
FT MEADE 
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National Action Plan 
for Energy Efficiency 

A PLAN DEVELOPED BY MORE THAN 50 LEADING 

ORGANIZATIONS IN PURSUIT OF ENERGY SAVINGS 
AND ENVIRONMENTAL BENEFITS THROUGH 

ELECTRIC AND NATURAL GAS ENERGY EFFICIENCY 


JULY 2006 




The goal is to create a sustainable, 
aggressive national commitment 
to energy efficiency through gas and 
electric utilities, utility regulators, 
and partner organizations. 


Improving energy efficiency in our homes, businesses, schools, governments, and indus¬ 
tries—which consume more than 70 percent of the natural gas and electricity used in the 
country—is one of the most constructive, cost-effective ways to address the 
challenges of high energy prices, energy security and independence, air pollution, and 
global climate change. 

The U.S. Department of Energy and U.S. Environmental Protection Agency facilitate the 
work of the Leadership Group and the National Action Plan for Energy Efficiency. 




Acknowledgements 



/ v 


( CCT 15. VOO 7 

V 

r c • »jccfR 


The National Action Plan for Energy Efficiency Report discusses policy, planning, and program issues based on a formal 
work plan developed during the December 2005 and March 2006 Leadership Group meetings. The Leadership Group is 
led by co-chairs Diane Munns (Member of the Iowa Utilities Board and President of the National Association of Regulatory 
Utility Commissioners) and Jim Rogers (President and Chief Executive Officer of Duke Energy). A full list of Leadership 
Group members is provided in both the Executive Summary (Table ES-1) and Chapter 1 (Table 1-2) of this report. Rich 
Scheer of Energetics Inc. facilitated the Leadership Group discussions during both Leadership Group meetings. 


Expert consultants, funded by the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency 
(EPA), drafted many chapters of the Action Plan Report. These consultants included: 


• Regulatory Assistance Project: Chapter 2 and Appendix A 


•Energy and Environmental Economics, Inc.: Chapters 3 through 5, Energy Efficiency Benefits Calculator, 
and Appendix B 


•KEMA: Chapter 6 

In addition. Rich Sedano of the Regulatory Assistance Project and Alison Silverstein of Alison Silverstein Consulting 
provided their expertise during review and editing of the overall report. 

DOE and EPA facilitated the work of the Leadership Group and this report, including Larry Mansueti with DOE's Office 
of Electricity Delivery and Energy Reliability, Mark Ginsberg with DOE's Office of Energy Efficiency and Renewable 
Energy, and Kathleen Hogan, Stacy Angel, Maureen McNamara, Katrina Pielli, and Tom Kerr with EPA's Climate 
Protection Partnership Division. 

Eastern Research Group, Inc. provided technical review, copyediting, graphics, and production services. 


To create a sustainable, aggressive national commitment to energy efficiency 


i 











List of Figures 


Figure ES-1. National Action Plan for Energy Efficiency Recommendations.ES-2 

Figure ES-2. National Action Plan for Energy Efficiency Recommendations & Options.ES-8 

Figure 1-1. Energy Efficiency Spending Has Declined.1-5 


Figure 1-2. Energy Efficiency Has Been a Resource in the Pacific Northwest for the Past Two Decades.... 1-7 
Figure 1-3. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage 


Greater Energy Efficiency.1-11 

Figure 3-1. Energy-Efficiency Supply Curve - Potential in 2011.3-2 

Figure 3-2. California Efficiency Structure Overview.3-10 

Figure 3-3. California Investor-Owned Utility Process.3-11 

Figure 3-4. BPA Transmission Planning Process.3-12 

Figure 3-5. New York Efficiency Structure Overview.3-13 

Figure 4-1. Comparison of Deferral Length with Low- and High-Growth.4-10 

Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative.6-33 

Figure 7-1. National Action Plan for Energy Efficiency Recommendations.7-1 

Figure 7-2. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage 

Greater Energy Efficiency.7-2 


ii National Action Plan for Energy Efficiency 


















List of Tables 


■■■■■ 


Table ES-1. Members of the National Action Plan for Energy Efficiency.ES-10 

Table 1-1. Summary of Benefits for National Energy Efficiency Efforts.1-8 

Table 1-2. Members of the National Action Plan for Energy Efficiency.1-16 

Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons.2-6 

Table 2-2. Examples of Decoupling.2-12 

Table 2-3. Examples of Incentives for Energy Efficiency Investments.2-15 

Table 3-1. Levelized Costs and Benefits From Four Regions.3-9 

Table 3-2. Incorporation of Energy Efficiency in California's Investor-Owned Utilities' 

Planning Processes.3-11 

Table 3-3. Incorporation of Energy Efficiency in BPA's Planning Processes.3-13 

Table 3-4. Incorporation of Energy Efficiency in NYSERDA's Planning Processes.3-14 

Table 3-5. Incorporation of Energy Efficiency in Minnesota's Planning Processes.3-15 

Table 3-6. Incorporation of Energy Efficiency in Texas' Planning Processes.3-16 

Table 3-7. Incorporation of Energy Efficiency in PacifiCorp's Planning Processes.3-17 

Table 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed.4-3 

Table 4-2. High- and Low-Growth Results: Electric Utility.4-6 

Table 4-3. High- and Low-Growth Results: Natural Gas Utility.4-8 

Table 4-4. Power Plant Deferral Results.4-11 

Table 4-5. Vertically Integrated and Delivery Company Results.4-13 

Table 4-6. Publicly- and Cooperatively-Owned Utility Results.4-15 

Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates.5-6 

Table 5-2. Pros and Cons of Rate Design Forms.5-9 

Table 5-3. Conditions That Assist Success.5-11 

Table 6-1. Overview of Energy Efficiency Programs.6-4 

Table 6-2. Efficiency Measures of Natural Gas Savings Programs.6-6 

Table 6-3. Efficiency Measures of Electric and Combination Programs.6-8 

Table 6-4. Achievable Energy Efficiency Potential From Recent Studies.6-16 

Table 6-5. NYSERDA 2004 Portfolio.6-20 


To create a sustainable, aggressive national commitment to energy efficiency iii 































List Of Tables (continued) 

Table 6-6. Nevada Resource Planning Programs.6-21 

Table 6-7. Overview of Cost-Effectiveness Tests.6-23 

Table 6-8. Research & Development (R&D) Activities of Select Organizations.6-25 

Table 6-9. Emerging Technologies for Programs. 6-27 

Table 6-10. Key Stakeholders, Barriers, and Program Strategies by Customer Segment.6-31 

Table 6-11. Types of Financial Incentives.6-40 

Table 6-12. Sample Progression of Program Designs.6-42 

Table 6-13. Program Examples for Key Customer Segments.6-44 

Table 6-14. Evaluation Approaches.6-46 

Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter.7-3 


lv National Action Plan for Energy Efficiency 
















List of Acronyms 


A 


aMW 

B 

average megawatts 

Bcf 

billion cubic feet 

BOMA 

Building Owners & Managers 
Association 

BPA 

Bonneville Power Administration 

c 


C/I 

commercial and industrial 

CEC 

California Energy Commission 

co 2 

carbon dioxide 

CPP 

critical peak pricing 

CPUC 

D 

California Public Utility Commission 


DEER Database for Energy Efficiency 

Resources 


DOE 

DSM 

E 

U.S. Department of Energy 

demand-side management 

EE 

energy efficiency 

EEPS 

energy efficiency portfolio standard 

EERS 

energy efficiency resource standard 

EPA 

U.S. Environmental Protection Agency 

EPRI 

Electric Power Research Institute 

ESCO 

energy services company 

ETO 

Energy Trust of Oregon 


F 


FERC 

Federal Energy Regulatory Commission 

G 


GWh 

gigawatt-hour (1,000,000 kWh) 

H 


HERS 

Home Energy Rating System 

HVAC 

heating, ventilation, and air 

i 

conditioning 

IOU 

investor-owned utility 

IPMVP 

International Performance 
Measurement and Verification 

Protocol 

IRP 

integrated resource plan 

ISO 

independent system operator 

ISO-NE 

ISO New England 

K 


kWh 

kilowatt-hour (3,412 British thermal units) 

L 



LIHEAP Low-Income Home Energy Assistance 

Program 

LIPA Long Island Power Authority 


To create a sustainable, aggressive national commitment to energy efficiency 


v 









List of Acronyms (continued) 


M 


R 


M&V 

measurement and verification 

R&D 

research and development 

Mcf 

one thousand cubic feet 

RARP 

Residential Appliance Recycling 

MMBtu 

million British thermal units 


Program 



REAP 

Residential Energy Affordability 

MW 

megawatt (1,000,000 watts) 


Partnership Program 

MWh 

megawatt-hour (1,000 kWh) 

RFP 

request for proposals 



RGGI 

Regional Greenhouse Gas Initiative 

N 






RIM 

rate impact measure 

NEEP 

Northeast Energy Efficiency Partnerships 

ROE 

return on equity 

NERC 

North American Electric Reliability 

RPC 

revenue per customer 


Council 

RTO 

regional transmission organization 

NO x 

nitrogen oxides 

RTP 

real-time pricing 

NPV 

net present value 



NSPC 

Non-Residential Standard 

s 



Performance Contract 

. 


NWPCC 

Northwest Power and Conservation 

SBC 

system benefits charge 


Council 





SCE 

Southern California Edison 

NYSERDA 

New York State Energy Research and 




Development Authority 

SMUD 

Sacramento Municipal Utility District 



so 2 

sulfur dioxide 

p 





... '' ■ ■—I',—. 

T 


PBL 

Power Business Line 



PG&E 

Pacific Gas & Electric 

TOU 

time of use 

PIER 

Public Interest Energy Research 

TRC 

total resource cost 

PSE 

Puget Sound Energy 

V 


PUCT 

Public Utility Commission of Texas 


PURPA 

Public Utility Regulatory Policies Act 

VOLL 

value of lost load 



VOS 

value of service 



w 




WAP 

Weatherization Assistance Program 


vi National Action Plan for Energy Efficiency 












Table of Contents 


Acknowledgements. 

List of Figures. 

List of Tables. 

List of Acronyms. 

Executive Summary. 

Chapter 1: Introduction and Background. 

Chapter 2: Utility Ratemaking & Revenue Requirements. 

Chapter 3: Energy Resource Planning Processes. 

Chapter 4: Business Case for Energy Efficiency. 

Chapter 5: Rate Design. 

Chapter 6: Energy Efficiency Program Best Practices. 

Chapter 7: Report Summary. 

Appendix A: Additional Guidance on Removing the Throughput Incentive 
Appendix B: Business Case Details. 


....iii 

.v 

ES-1 

.. 1-1 

.. 2-1 

..3-1 

..4-1 

..5-1 

.. 6-1 

..7-1 

.A-1 

..B-1 


To create a sustainable, aggressive national commitment to energy efficiency 


vii 





















Executive Summary 



This National Action Plan for Energy Efficiency (Action Plan) presents policy recommendations for creating 
a sustainable, aggressive national commitment to energy efficiency through gas and electric utilities, 
utility regulators, and partner organizations. Such a commitment could save Americans many billions of 
dollars on energy bills over the next 10 to 15 years, contribute to energy security, and improve our 
environment. The Action Plan was developed by more than 50 leading organizations representing key 
stakeholder perspectives. These organizations pledge to take specific actions to make the Action Plan a reality. 


A National Action Plan 
for Energy Efficiency 

We currently face a set of serious challenges with regard 
to the U.S. energy system. Energy demand continues to 
grow despite historically high energy prices and mount¬ 
ing concerns over energy security and independence as 
well as air pollution and global climate change. The deci¬ 
sions we make now regarding our energy supply and 
demand can either help us deal with these challenges 
more effectively or complicate our ability to secure a 
more stable, economical energy future. 

Improving the energy efficiency 1 of our homes, business¬ 
es, schools, governments, and industries—which 
consume more than 70 percent of the natural gas and 
electricity used in the country—is one of the most 
constructive, cost-effective ways to address these chal¬ 
lenges. 2 Increased investment in energy efficiency in our 
homes, buildings, and industries can lower energy bills, 
reduce demand for fossil fuels, help stabilize energy 
prices, enhance electric and natural gas system reliabili¬ 
ty, and help reduce air pollutants and greenhouse gases. 

Despite these benefits and the success of energy effi¬ 
ciency programs in some regions of the country, energy 
efficiency remains critically underutilized in the nation's 
energy portfolio. 3 Now we simultaneously face the chal¬ 
lenges of high prices, the need for large investments in 
new energy infrastructure, environmental concerns, and 


security issues. It is time to take advantage of more than 
two decades of experience with successful energy effi¬ 
ciency programs, broaden and expand these efforts, and 
capture the savings that energy efficiency offers. Much 
more can be achieved in concert with ongoing efforts to 
advance building codes and appliance standards, provide 
tax incentives for efficient products and buildings, and 
promote savings opportunities through programs such 
as ENERGY STAR®. Efficiency of new buildings and those 
already in place are both important. Many homeowners, 
businesses, and others in buildings and facilities already 
standing today—which will represent the vast majority 
of the nation's buildings and facilities for years to 
come—can realize significant savings from proven energy 
efficiency programs. 

Bringing more energy efficiency into the nation's energy 
mix to slow demand growth in a wise, cost-effective 
manner—one that balances energy efficiency with new 
generation and supply options—will take concerted 
efforts by all energy market participants: customers, util¬ 
ities, regulators, states, consumer advocates, energy 
service companies (ESCOs), and others. It will require 
education on the opportunities, review of existing poli¬ 
cies, identification of barriers and their solutions, assess¬ 
ment of new technologies, and modification and adop¬ 
tion of policies, as appropriate. Utilities, 4 regulators, and 
partner organizations need to improve customer access 
to energy efficiency programs to help them control their 
own energy costs, provide the funding necessary to 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-1 











deliver these programs, and examine policies governing 
energy companies to ensure that these policies facili¬ 
tate—not impede—cost-effective programs for energy 
efficiency. Historically, the regulatory structure has 
rewarded utilities for building infrastructure (e.g., power 
plants, transmission lines, pipelines) and selling energy, 
while discouraging energy efficiency, even when the 
energy-saving measures cost less than constructing new 
infrastructure. 5 And, it has been difficult to establish the 
funding necessary to capture the potential benefits that 
cost-effective energy efficiency offers. 

This National Action Plan for Energy Efficiency is a call to 
action to bring diverse stakeholders together at the 
national, regional, state, or utility level, as appropriate, 
and foster the discussions, decision-making, and commit¬ 
ments necessary to take investment in energy efficiency to 
a new level. The overall goal is to create a sustainable, 
aggressive national commitment to energy efficiency 
through gas and electric utilities, utility regulators, and 
partner organizations. 

The Action Plan was developed by a Leadership Group 
composed of more than 50 leading organizations repre¬ 
senting diverse stakeholder perspectives. Based upon the 
policies, practices, and efforts of many organizations 
across the country, the Leadership Group offers five 


recommendations as ways to overcome many of the 
barriers that have limited greater investment in programs 
to deliver energy efficiency to customers of electric and 
gas utilities (Figure ES-1). These recommendations may 
be pursued through a number of different options, 
depending upon state and utility circumstances. 

As part of the Action Plan, leading organizations are com¬ 
mitting to aggressively pursue energy efficiency opportu¬ 
nities in their organizations and assist others who want to 
increase the use of energy efficiency in their regions. 
Because greater investment in energy efficiency cannot 
happen based on the work of one individual or organiza¬ 
tion alone, the Action Plan is a commitment to bring the 
appropriate stakeholders together—including utilities, 
state policy-makers, consumers, consumer advocates, 
businesses, ESCOs, and others—to be part of a collabora¬ 
tive effort to take energy efficiency to a new level. As 
energy experts, utilities may be in a unique position to play 
a leading role. 

The reasons behind the National Action Plan for Energy 
Efficiency, the process for developing the Action Plan, 
and the final recommendations are summarized in 
greater detail as follows. 


Figure ES-1. National Action Plan for Energy Efficiency Recommendations 


• Recognize energy efficiency as a high-priority energy resource. 

• Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities for energy efficiency. 

• Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective. 

• Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and 
modify ratemaking practices to promote energy efficiency investments. 



ES-2 


National Action Plan for Energy Efficiency 










The United States Faces Large and 
Complex Energy Challenges 

Our expanding economy, growing population, and rising 
standard of living all depend on energy services. Current 
projections anticipate U.S. energy demands to increase 
by more than one-third by 2030, with electricity demand 
alone rising by more than 40 percent (EIA, 2006). At 
work and at home, we continue to rely on more and 
more energy-consuming devices. At the same time, the 
country has entered a period of higher energy costs and 
limited supplies of natural gas, heating oil, and other 
fuels. These issues present many challenges: 

Growing energy demand stresses current systems, 
drives up energy costs, and requires new investments. 

Events such as the Northeast electricity blackout of 
August 2003 and Hurricanes Katrina and Rita in 2005 
increased focus on energy reliability and its economic 
and human impacts. Transmission and pipeline systems 
are becoming overburdened in places. Overburdened 
systems limit the availability of low-cost electricity and 
fossil fuels, raise energy prices in or near congested 
areas, and potentially compromise energy system relia¬ 
bility. High fuel prices also contribute to higher electrici¬ 
ty prices. In addition, our demand for natural gas to heat 
our homes, for industrial and business use, and for 
power generation is straining the available gas supply in 
North America and putting upward pressure on natural 
gas prices. Addressing these issues will require billions of 
dollars in investments in energy efficiency, new power 
plants, gas rigs, transmission lines, pipelines, and other 
infrastructure, notwithstanding the difficulty of building 
new energy infrastructure in dense urban and suburban 
areas. In the absence of investments in new or expand¬ 
ed capacity, existing facilities are being stretched to the 
point where system reliability is steadily eroding, and the 
ability to import lower cost energy into high-growth load 
areas is inhibited, potentially limiting economic expansion. 

High fuel prices increase financial burdens on house¬ 
holds and businesses and slow our economy. Many 
household budgets are being strained by higher energy 


costs, leaving less money available for other household 
purchases and needs. This burden is particularly harmful 
for low-income households. Higher energy bills for 
industry can reduce the nation's economic competitive¬ 
ness and place U.S. jobs at risk. 

Growing energy demand challenges attainment of 
clean air and other public health and environmental 
goals. Energy demand continues to grow at the same 
time that national and state regulations are being imple¬ 
mented to limit the emission of air pollutants, such as sul¬ 
fur dioxide (S0 2 ), nitrogen oxides (NO x ), and mercury, to 
protect public health and the environment. In addition, 
emissions of greenhouse gases continue to increase. 

Uncertainties in future prices and regulations raise 
questions about new investments. New infrastructure 
is being planned in the face of uncertainties about future 
energy prices. For example, high natural gas prices and 
uncertainty about greenhouse gas and other environ¬ 
mental regulations, impede investment decisions on new 
energy supply options. 

Our energy system is vulnerable to disruptions in 
energy supply and delivery. Natural disasters such as 
the hurricanes of 2005 exposed the vulnerability of the 
U.S. energy system to major disruptions, which have sig¬ 
nificant impacts on energy prices and service reliability. In 
response, national security concerns suggest that we 
should use fossil fuel energy more efficiently, increase 
supply diversity, and decrease the vulnerability of domes¬ 
tic infrastructure to natural disasters. 

Energy Efficiency Can Be a Beneficial 
Resource in Our Energy Systems 

Greater investment in energy efficiency can help us tack¬ 
le these challenges. Energy efficiency is already a key 
component in the nation's energy resource mix in many 
parts of the country. Utilities, states, and others across 
the United States have decades of experience in deliver¬ 
ing energy efficiency to their customers. These programs 
can provide valuable models, upon which more states, 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-3 








Benefits of Energy Efficiency 


Lower energy bills, greater customer control, and 
greater customer satisfaction. Well-designed energy 
efficiency programs can provide opportunities for cus¬ 
tomers of all types to adopt energy savings measures 
that can improve their comfort and level of service, 
while reducing their energy bills. 6 These programs can 
help customers make sound energy use decisions, 
increase control over their energy bills, and empower 
them to manage their energy usage. Customers are 
experiencing savings of 5, 10, 20, or 30 percent, 
depending upon the customer, program, and average 
bill. Offering these programs can also lead to greater 
customer satisfaction with the service provider. 

Lower cost than supplying new generation only 
from new power plants. In some states, well- 
designed energy efficiency programs are saving ener¬ 
gy at an average cost of about one-half of the typical 
cost of new power sources and about one-third of the 
cost of natural gas supply (EIA, 2006). 7 When inte¬ 
grated into a long-term energy resource plan, energy 
efficiency programs could help defer investments 
in new plants and lower the total cost of delivering 
electricity. 

Modular and quick to deploy. Energy efficiency pro¬ 
grams can be ramped up over a period of one to three 
years to deliver sizable savings. These programs can 
also be targeted to congested areas with high prices 
to bring relief where it might be difficult to deliver 
new supply in the near term. 

Significant energy savings. Well-designed energy 
efficiency programs are delivering annual energy sav¬ 
ings on the order of 1 percent of electricity and natu¬ 
ral gas sales. 8 These programs are helping to offset 20 
to 50 percent of expected growth in energy demand 
in some areas without compromising the end users' 
activities and economic well-being (Nadel et al., 2004; 
EIA, 2006). 


Environmental benefits. While reducing customers' 
energy bills, cost-effective energy efficiency offers 
environmental benefits related to reduced demand 
such as lower air pollution, reduced greenhouse gas 
emissions, lower water use, and less environmental 
damage from fossil fuel extraction. Energy efficiency 
can be an attractive option for utilities in advance of 
requirements to reduce greenhouse gas emissions. 

Economic development. Greater investment in ener¬ 
gy efficiency helps build jobs and improve state 
economies. Energy efficiency users often redirect their 
bill savings toward other activities that increase local 
and national employment, with a higher employment 
impact than if the money had been spent to purchase 
energy (Kushler et al., 2005; NYSERDA, 2004). Many 
energy efficiency programs create construction and 
installation jobs, with multiplier impacts on employ¬ 
ment and local economies. Local investments in ener¬ 
gy efficiency can offset imports from out-of-state, 
improving the state balance of trade. Lastly, energy 
efficiency investments usually create long-lasting 
infrastructure changes to building, equipment and 
appliance stocks, creating long-term property 
improvements that deliver long-term economic value 
(Innovest, 2002). 

Energy security. Energy efficiency reduces the level of 
U.S. per capita energy consumption, thus decreasing 
the vulnerability of the economy and individual con¬ 
sumers to energy price disruptions from natural disas¬ 
ters and attacks on domestic and international energy 
supplies and infrastructure. In addition, energy effi¬ 
ciency can be used to reduce the overall system peak 
demand or the peak demand in targeted load areas 
with limited generating or transport capability. 
Reducing peak demand improves system reliability 
and reduces the potential for unplanned brown¬ 
outs or black-outs, which can have large adverse 
economic consequences. 


ES-4 


National Action Plan for Energy Efficiency 


utilities, and other organizations can build. Experience 
shows that energy efficiency programs can lower 
customer energy bills; cost less than, and help defer, 
new energy infrastructure; provide energy savings to 
consumers; improve the environment; and spur local 
economic development (see box on Benefits of 
Energy Efficiency). Significant opportunities for energy 
efficiency are likely to continue to be available at low 
costs in the future. State and regional studies have found 
that adoption of economically attractive, but as yet 
untapped, energy efficiency could yield more than 20 
percent savings in total electricity demand nationwide by 
2025. Depending on the underlying load growth, these 
savings could help cut load growth by half or more com¬ 
pared to current forecasts (Nadel et al., 2004; SWEEP, 
2002; NEEP, 2005; NWPCC, 2005; WGA, 2006). 
Similarly, savings from direct use of natural gas could 
provide a 50 percent or greater reduction in natural gas 
demand growth (Nadel et al., 2004). 

Capturing this energy efficiency resource would offer 
substantial economic and environmental benefits across 
the country. Widespread application of energy efficiency 
programs that already exist in some regions could deliv¬ 
er a large part of these potential savings. 9 Extrapolating 
the results from existing programs to the entire country 
would yield annual energy bill savings of nearly $20 bil¬ 
lion, with net societal benefits of more than $250 billion 
over the next 10 to 15 years. This scenario could defer 
the need for 20,000 megawatts (MW), or 40 new 500- 
MW power plants, as well as reduce U.S. emissions from 
energy production and use by more than 200 million 
tons of carbon dioxide (C0 2 ), 50,000 tons of S0 2( and 
40,000 tons of NO x annually. 10 These significant eco¬ 
nomic and environmental benefits can be achieved rela¬ 
tively quickly because energy efficiency programs can be 
developed and implemented within several years. 

Additional policies and programs are required to help 
capture these potential benefits and address our sub¬ 
stantial underinvestment in energy efficiency as a nation. 
An important indicator of this underinvestment is that 
the level of funding across the country for organized effi¬ 


ciency programs is currently less than $2 billion per year 
while it would require about 4 times today's funding lev¬ 
els to achieve the economic and environment benefits 
presented above. 1 ^ 12 

The current underinvestment in energy efficiency is due 
to a number of well-recognized barriers, including some 
of the regulatory policies that govern electric and natu¬ 
ral gas utilities. These barriers include: 

• Market barriers, such as the well-known "split- 
incentive" barrier, which limits home builders' and 
commercial developers' motivation to invest in energy 
efficiency for new buildings because they do not 

pay the energy bill; and the transaction cost barrier, 
which chronically affects individual consumer and 
small business decision-making. 

• Customer barriers, such as lack of information on 
energy saving opportunities, lack of awareness of 
how energy efficiency programs make investments 
easier, and lack of funding to invest in energy 
efficiency. 

• Public policy barriers, which can present prohibitive 
disincentives for utility support and investment in 
energy efficiency in many cases. 

• Utility, state, and regional planning barriers, which 
do not allow energy efficiency to compete with 
supply-side resources in energy planning. 

• Energy efficiency program barriers, which limit 
investment due to lack of knowledge about the 
most effective and cost-effective energy efficiency 
program portfolios, programs for overcoming 
common marketplace barriers to energy efficiency, 
or available technologies. 

While a number of energy efficiency policies and programs 
contribute to addressing these barriers, such as building 
codes, appliance standards, and state government lead¬ 
ership programs, organized energy efficiency programs 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-5 


provide an important opportunity to deliver greater 
energy efficiency in the homes, buildings, and facilities 
that already exist today and that will consume the major¬ 
ity of the energy used in these sectors for years to come. 

The Leadership Group and National 
Action Plan for Energy Efficiency 

Recognizing that energy efficiency remains a critically 
underutilized resource in the nation's energy portfolio, 
more than 50 leading electric and gas utilities, state util¬ 
ity commissioners, state air and energy agencies, energy 
service providers, energy consumers, and energy effi¬ 
ciency and consumer advocates have formed a 
Leadership Group, together with the U.S. Department of 
Energy (DOE) and the U.S. Environmental Protection 
Agency (EPA), to address the issue. The goal of this 
group is to create a sustainable, aggressive national com¬ 
mitment to energy efficiency through gas and electric 
utilities, utility regulators, and partner organizations. The 
Leadership Group recognizes that utilities and regulators 
play critical roles in bringing energy efficiency programs 
to their communities and that success requires the joint 
efforts of customers, utilities, regulators, states, and 
other partner organizations. 

Under co-chairs Diane Munns (Member of the Iowa 
Utilities Board and President of the National Association 
of Regulatory Utility Commissioners) and Jim Rogers 
(President and Chief Executive Officer of Duke Energy), 
the Leadership Group members (see Table ES-1) have 
developed the National Action Plan for Energy Efficiency 
Report, which: 

• Identifies key barriers limiting greater investment in 
energy efficiency. 

• Reviews sound business practices for removing these 
barriers and improving the acceptance and use of 
energy efficiency relative to energy supply options. 

•Outlines recommendations and options for 
overcoming these barriers. 


The members of the Leadership Group have agreed to 
pursue these recommendations and consider these 
options through their own actions, where appropriate, 
and to support energy efficiency initiatives by other 
industry members and stakeholders. 

Recommendations 

The National Action Plan for Energy Efficiency is a call to 
action to utilities, state utility regulators, consumer advo¬ 
cates, consumers, businesses, other state officials, and 
other stakeholders to create an aggressive, sustainable 
national commitment to energy efficiency. 1 The Action 
Plan offers the following recommendations as ways to 
overcome barriers that have limited greater investment 
in energy efficiency for customers of electric and gas util¬ 
ities in many parts of the country. The following recom¬ 
mendations are based on the policies, practices, and 
efforts of leading organizations across the country. For 
each recommendation, a number of options are avail¬ 
able to be pursued based on regional, state, and utility 
circumstances (see also Figure ES-2). 

Recognize energy efficiency as a high-priority energy 
resource. Energy efficiency has not been consistently 
viewed as a meaningful or dependable resource com¬ 
pared to new supply options, regardless of its demon¬ 
strated contributions to meeting load growth. 13 
Recognizing energy efficiency as a high-priority energy 
resource is an important step in efforts to capture the 
benefits it offers and lower the overall cost of energy 
services to customers. Based on jurisdictional objectives, 
energy efficiency can be incorporated into resource plans 
to account for the long-term benefits from energy sav¬ 
ings, capacity savings, potential reductions of air pollu¬ 
tants and greenhouse gases, as well as other benefits. 
The explicit integration of energy efficiency resources 
into the formalized resource planning processes that 
exist at regional, state, and utility levels can help estab¬ 
lish the rationale for energy efficiency funding levels and 
for properly valuing and balancing the benefits. In some 
jurisdictions, these existing planning processes might 
need to be adapted or even created to meaningfully 


ES-6 


National Action Plan for Energy Efficiency 





incorporate energy efficiency resources into resource 
planning. Some states have recognized energy efficiency 
as the resource of first priority due to its broad benefits. 

Make a strong, long-term commitment to implement 
cost-effective energy efficiency as a resource. Energy 
efficiency programs are most successful and provide the 
greatest benefits to stakeholders when appropriate poli¬ 
cies are established and maintained over the long-term. 
Confidence in long-term stability of the program will 
help maintain energy efficiency as a dependable 
resource compared to supply-side resources, deferring or 
even avoiding the need for other infrastructure invest¬ 
ments, and maintain customer awareness and support. 
Some steps might include assessing the long-term 
potential for cost-effective energy efficiency within a 
region (i.e., the energy efficiency that can be delivered 
cost-effectively through proven programs for each cus¬ 
tomer class within a planning horizon); examining the 
role for cutting-edge initiatives and technologies; estab¬ 
lishing the cost of supply-side options versus energy effi¬ 
ciency; establishing robust measurement and verification 
(M&V) procedures; and providing for routine updates to 
information on energy efficiency potential and key costs. 

Broadly communicate the benefits of and opportuni¬ 
ties for energy efficiency. Experience shows that ener¬ 
gy efficiency programs help customers save money and 
contribute to lower cost energy systems. But these ben¬ 
efits are not fully documented nor recognized by cus¬ 
tomers, utilities, regulators, or policy-makers. More 
effort is needed to establish the business case for ener¬ 
gy efficiency for all decision-makers and to show how a 
well-designed approach to energy efficiency can benefit 
customers, utilities, and society by (1) reducing cus¬ 
tomers' bills over time, (2) fostering financially healthy 
utilities (e.g., return on equity, earnings per share, and 
debt coverage ratios unaffected), and (3) contributing to 
positive societal net benefits overall. Effort is also neces¬ 
sary to educate key stakeholders that although energy 
efficiency can be an important low-cost resource to inte¬ 
grate into the energy mix, it does require funding just as 
a new power plant requires funding. Further, education 


is necessary on the impact that energy efficiency pro¬ 
grams can have in concert with other energy efficiency 
policies such as building codes, appliance standards, and 
tax incentives. 

Promote sufficient, timely, and stable program fund¬ 
ing to deliver energy efficiency where cost-effective. 

Energy efficiency programs require consistent and long¬ 
term funding to effectively compete with energy supply 
options. Efforts are necessary to establish this consistent 
long-term funding. A variety of mechanisms have been, 
and can be, used based on state, utility, and other stake¬ 
holder interests. It is important to ensure that the effi¬ 
ciency programs' providers have sufficient long-term 
funding to recover program costs and implement the 
energy efficiency measures that have been demonstrat¬ 
ed to be available and cost effective. A number of states 
are now linking program funding to the achievement of 
energy savings. 

Modify policies to align utility incentives with the 
delivery of cost-effective energy efficiency and modify 
ratemaking practices to promote energy efficiency 
investments. Successful energy efficiency programs 
would be promoted by aligning utility incentives in a 
manner that encourages the delivery of energy efficien¬ 
cy as part of a balanced portfolio of supply, demand, and 
transmission investments. Historically, regulatory policies 
governing utilities have more commonly compensated 
utilities for building infrastructure (e.g., power plants, 
transmission lines, pipelines) and selling energy, while 
discouraging energy efficiency, even when the energy¬ 
saving measures might cost less. Within the existing reg¬ 
ulatory processes, utilities, regulators, and stakeholders 
have a number of opportunities to create the incentives 
for energy efficiency investments by utilities and cus¬ 
tomers. A variety of mechanisms have already been 
used. For example, parties can decide to provide incen¬ 
tives for energy efficiency similar to utility incentives for 
new infrastructure investments, provide rewards for pru¬ 
dent management of energy efficiency programs, and 
incorporate energy efficiency as an important area of 
consideration within rate design. Rate design offers 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-7 


Figure ES-2. National Action Plan for Energy Efficiency Recommendations & Options 




Recognize energy efficiency as a high priority 

energy resource. 

Options to consider: 

• Establishing policies to establish energy efficiency as 
a priority resource. 

• Integrating energy efficiency into utility, state, and 
regional resource planning activities. 

• Quantifying and establishing the value of energy 
efficiency, considering energy savings, capacity sav¬ 
ings, and environmental benefits, as appropriate. 

Make a strong, long-term commitment to implement 

cost-effective energy efficiency as a resource. 

Options to consider: 

• Establishing appropriate cost-effectiveness tests for 
a portfolio of programs to reflect the long-term 
benefits of energy efficiency. 

• Establishing the potential for long-term, cost- 
effective energy efficiency savings by customer class 
through proven programs, innovative initiatives, 
and cutting-edge technologies. 

• Establishing funding requirements for delivering 
long-term, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part 
of energy planning processes. 

• Developing robust measurement and verification 
(M&V) procedures. 

• Designating which organization(s) is responsible 
for administering the energy efficiency programs. 

• Providing for frequent updates to energy 
resource plans to accommodate new information 
and technology. 

Broadly communicate the benefits of and 

opportunities for energy efficiency. 

Options to consider: 

• Establishing and educating stakeholders on the 
business case for energy efficiency at the state, util¬ 
ity, and other appropriate level addressing relevant 
customer, utility, and societal perspectives. 

• Communicating the role of energy efficiency in 


lowering customer energy bills and system costs 
and risks over time. 

•Communicating the role of building codes, appli¬ 
ance standards, and tax and other incentives. 

Provide sufficient, timely, and stable program funding 
to deliver energy efficiency where cost-effective. 
Options to consider: 

• Deciding on and committing to a consistent 

way for program administrators to recover energy 
efficiency costs in a timely manner. 

• Establishing funding mechanisms for energy 
efficiency from among the available options such 
as revenue requirement or resource procurement 
funding, system benefits charges, rate-basing, 
shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 

Modify policies to align utility incentives with the 
delivery of cost-effective energy efficiency and 
modify ratemaking practices to promote energy 
efficiency investments. 

Options to consider: 

•Addressing the typical utility throughput incentive 
and removing other regulatory and management 
disincentives to energy efficiency. 

• Providing utility incentives for the successful 
management of energy efficiency programs. 

• Including the impact on adoption of energy 
efficiency as one of the goals of retail rate design, 
recognizing that it must be balanced with other 
objectives. 

• Eliminating rate designs that discourage energy 
efficiency by not increasing costs as customers 
consume more electricity or natural gas. 

•Adopting rate designs that encourage energy 
efficiency by considering the unique characteristics 
of each customer class and including partnering 
tariffs with other mechanisms that encourage 
energy efficiency, such as benefit sharing programs 
and on-bill financing. 


ES-8 


National Action Plan for Energy Efficiency 



opportunities to encourage customers to invest in 
efficiency where they find it to be cost effective and 
participate in new programs that provide innovative 
technologies (e.g., smart meters) to help customers 
control their energy costs. 

National Action Plan for Energy 
Efficiency: Next Steps 

In summer 2006, members of the Leadership Group of 
the National Action Plan on Energy Efficiency are 
announcing a number of specific activities and initiatives 
to formalize and reinforce their commitments to energy 
efficiency as a resource. To assist the Leadership Group 
and others in making and fulfilling their commitments, a 
number of tools and resources have been developed: 

National Action Plan for Energy Efficiency Report. 

This report details the key barriers to energy efficiency in 
resource planning, utility incentive mechanisms, rate 
design, and the design and implementation of energy 
efficiency programs. It also reviews and presents a vari¬ 
ety of policy and program solutions that have been used 
to overcome these barriers as well as the pros and cons 
for many of these approaches. 

Energy Efficiency Benefits Calculator. This calculator 
can be used to help educate stakeholders on the broad 
benefits of energy efficiency. It provides a simplified 
framework to demonstrate the business case for energy 
efficiency from the perspective of the consumer, the util¬ 
ity, and society. It has been used to explore the benefits 
of energy efficiency program investments under a range 
of utility structures, policy mechanisms, and energy 
growth scenarios. The calculator can be adapted and 
applied to other scenarios. 

Experts and Resource Materials on Energy Efficiency. 
A number of educational presentations on the potential 
for energy efficiency and various policies available for 
pursuing the recommendations of the Action Plan will be 
developed. In addition, lists of policy and program 
experts in energy efficiency and the various policies avail¬ 
able for pursuing the recommendations of the Action 


Plan will be developed. These lists will be drawn from 
utilities, state utility regulators, state energy offices, 
third-party energy efficiency program administrators, 
consumer advocacy organizations, ESCOs, and others. 
These resources will be available in fall 2006. 

DOE and EPA are continuing to facilitate the work of the 
Leadership Group and the National Action Plan 
for Energy Efficiency. During winter 2006-2007, the 
Leadership Group plans to report on its progress and 
identify next steps for the Action Plan. 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-9 






Table ES-1. Members of the National Action Plan for Energy Efficiency 


Co-Chairs 

Diane Munns 

Member 

Iowa Utilities Board 


President 

National Association of Regulatory Utility Commissioners 

Jim Rogers 

President and Chief Executive Officer 

Duke Energy 

Leadership Group 


Barry Abramson 

Senior Vice President 

Servidyne Systems, LLC 

Angela S. Beehler 

Director of Energy Regulation 

Wal-Mart Stores, Inc. 

Bruce Braine 

Vice President, Strategic Policy Analysis 

American Electric Power 

Jeff Burks 

Director of Environmental Sustainability 

PNM Resources 

Kateri Callahan 

President 

Alliance to Save Energy 

Glenn Cannon 

General Manager 

Waverly Light and Power 

Jorge Carrasco 

Superintendent 

Seattle City Light 

Lonnie Carter 

President and Chief Executive Officer 

Santee Cooper 

Mark Case 

Vice President for Business Performance 

Baltimore Gas and Electric 

Gary Connett 

Manager of Resource Planning and 

Member Services 

Great River Energy 

Larry Downes 

Chairman and Chief Executive Officer 

New Jersey Natural Gas 

(New Jersey Resources Corporation) 

Roger Duncan 

Deputy General Manager, Distributed Energy Services 

Austin Energy 

Angelo Esposito 

Senior Vice President, Energy Services and Technology 

New York Power Authority 

William Flynn 

Chairman 

New York State Public Service Commission 

Jeanne Fox 

President 

New Jersey Board of Public Utilities 

Anne George 

Commissioner 

Connecticut Department of Public Utility Control 

Dian Grueneich 

Commissioner 

California Public Utilities Commission 

Blair Hamilton 

Policy Director 

Vermont Energy Investment Corporation 

Leonard Haynes 

Executive Vice President, Supply Technologies, 
Renewables, and Demand Side Planning 

Southern Company 

Mary Healey 

Consumer Counsel for the State of Connecticut 

Connecticut Consumer Counsel 

Helen Howes 

Vice President, Environment, Health and Safety 

Exelon 

Chris James 

Air Director 

Connecticut Department of Environmental Protection 

Ruth Kinzey 

Director of Corporate Communications 

Food Lion 

Peter Lendrum 

Vice President, Sales and Marketing 

Entergy Corporation 

Rick Leuthauser 

Manager of Energy Efficiency 

MidAmerican Energy Company 

Mark McGahey 

Manager 

Tristate Generation and Transmission Association, Inc. 

Janine Migden- 
Ostrander 

Consumers' Counsel 

Office of the Ohio Consumers' Counsel 

Richard Morgan 

Commissioner 

District of Columbia Public Service Commission 

Brock Nicholson 

Deputy Director, Division of Air Quality 

North Carolina Air Office 

Pat Oshie 

Commissioner 

Washington Utilities and Transportation Commission 

Douglas Petitt 

Vice President, Government Affairs 

Vectren Corporation 


ES-10 


National Action Plan for Energy Efficiency 





Bill Prindle 
Phyllis Reha 
Roland Risser 
Gene Rodrigues 
Art Rosenfeld 
Jan Schori 
Larry Shirley 
Michael Shore 
Gordon Slack 
Deb Sundin 
Dub Taylor 

Paul von 
Paumgartten 

Brenna Walraven 
Devra Wang 
Steve Ward 
Mike Weedall 
Tom Welch 
Jim West 
Henry Yoshimura 

Observers 

James W. (Jay) 
Brew 

Roger Cooper 
Dan Delurey 
Roger Fragua 
Jeff Genzer 
Donald Gilligan 
Chuck Gray 

John Holt 
Joseph Mattingly 
Kenneth Mentzer 
Christina Mudd 
Ellen Petrill 
Alan Richardson 
Steve Rosenstock 
Diane Shea 
Rick Tempchin 
Mark Wolfe 


Deputy Director 
Commissioner 

Director, Customer Energy Efficiency 

Director, Energy Efficiency 

Commissioner 

General Manager 

Division Director 

Senior Air Policy Analyst 

Energy Business Director 

Director, Business Product Marketing 

Director 

Director, Energy and Environmental Affairs 

Executive Director, National Property Management 
Director, California Energy Program 
Public Advocate 

Vice President, Energy Efficiency 

Vice President, External Affairs 

Manager of energy right & Green Power Switch 

Manager, Demand Response 


American Council for an Energy-Efficient Economy 

Minnesota Public Utilities Commission 

Pacific Gas and Electric 

Southern California Edison 

California Energy Commission 

Sacramento Municipal Utility District 

North Carolina Energy Office 

Environmental Defense 

The Dow Chemical Company 

Xcel Energy 

Texas State Energy Conservation Office 
Johnson Controls 

USAA Realty Company 
Natural Resources Defense Council 
State of Maine 

Bonneville Power Administration 
PJM Interconnection 
Tennessee Valley Authority 
ISO New England Inc. 


Counsel 

Executive Vice President, Policy and Planning 

Executive Director 

Deputy Director 

General Counsel 

President 

Executive Director 

Senior Manager of Generation and Fuel 

Vice President, Secretary and General Counsel 

President and Chief Executive Officer 

Executive Director 

Director, Public/Private Partnerships 

President and Chief Executive Officer 

Manager, Energy Solutions 

Executive Director 

Director, Retail Distribution Policy 

Executive Director 


Steel Manufacturers Association 

American Gas Association 

Demand Response Coordinating Committee 

Council of Energy Resource Tribes 

National Association of State Energy Officials 

National Association of Energy Service Companies 

National Association of Regulatory Utility 
Commissioners 

National Rural Electric Cooperative Association 

Gas Appliance Manufacturers Association 

North American Insulation Manufacturers Association 

National Council on Electricity Policy 

Electric Power Research Institute 

American Public Power Association 

Edison Electric Institute 

National Association of State Energy Officials 

Edison Electric Institute 

Energy Programs Consortium 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-11 




Notes 


1 Energy efficiency refers to using less energy to pro¬ 
vide the same or improved level of service to the 
energy consumer in an economically efficient way. 
The term energy efficiency as used here includes 
using less energy at any time, including at times of 
peak demand through demand response and peak 
shaving efforts. 

2 Addressing transportation-related energy use is also 
an important challenge as energy demand in this 
sector continues to increase and oil prices hit histor¬ 
ical highs. However, transportation issues are out¬ 
side the scope of this effort, which is focused only 
on electricity and natural gas systems. 

3 This effort is focused on energy efficiency for regu¬ 
lated energy forms. Energy efficiency for unregulat¬ 
ed energy forms, such as fuel oil for example, is 
closely related in terms of actions in buildings, but is 
quite different in terms of how policy can promote 
investments. 

4 A utility is broadly defined as an organization that 
delivers electric and gas utility services to end users, 
including, but not limited to, investor-owned, pub¬ 
licly-owned, cooperatively-owned, and third-party 
energy efficiency utilities. 

5 Many energy efficiency programs have an average 
life cycle cost of $0.03/kilowatt-hour (kWh) saved, 
which is 50 to 75 percent of the typical cost of new 
power sources (ACEEE, 2004; EIA, 2006). The cost 
of energy efficiency programs varies by program and 
can include higher cost programs and options with 
lower costs to a utility such as modifying rate designs. 

6 See Chapter 6: Energy Efficiency Program Best 
Practices for more information on leading programs. 

7 Data refer to EIA 2006 new power costs and gas 
prices in 2015 compared to electric and gas pro¬ 
gram costs based on leading energy efficiency pro¬ 
grams, many of which are discussed in Chapter 6: 
Energy Efficiency Program Best Practices. 

8 Based on leading energy efficiency programs, many 
of which are discussed in Chapter 6: Energy 
Efficiency Program Best Practices. 

9 These estimates are based on assumptions of aver¬ 
age program spending levels by utilities or other 
program administrators, with conservatively high 
numbers for the cost of energy efficiency programs. 


See highlights of some of these programs in Chapter 
6: Energy Efficiency Program Best Practices, Tables 
6-1 and 6-2. 

10 These economic and environmental savings esti¬ 
mates are extrapolations of the results from region¬ 
al program to a national scope. Actual savings at the 
regional level vary based on a number of factors. For 
these estimates, avoided capacity value is based on 
peak load reductions de-rated for reductions that do 
not result in savings of capital investments. 
Emissions savings are based on a marginal on-peak 
generation fuel of natural gas and marginal off- 
peak fuel of coal; with the on-peak period capacity 
requirement double that of the annual average. 
These assumptions vary by region based upon situa¬ 
tion-specific variables. Reductions in capped emis¬ 
sions might reduce the cost of compliance. 

11 This estimate of the funding required assumes 2 
percent of revenues across electric utilities and 0.5 
percent across gas utilities. The estimate also 
assumes that energy efficiency is delivered at a total 
cost (utility and participant) of $0.04 per kWh and 
$3 per million British thermal units (MMBtu), which 
are higher than the costs of many of today's programs. 

12 This estimate is provided as an indicator of underin¬ 
vestment and is not intended to establish a national 
funding target. Appropriate funding levels for pro¬ 
grams should be established at the regional, state, 
or utility level. In addition, energy efficiency invest¬ 
ments by customers, businesses, industry, and gov¬ 
ernment also contribute to the larger economic and 
environment benefits of energy efficiency. 

13 One example of energy efficiency's ability to meet 
load growth is the Northwest Power Planning 
Council's Fifth Power Plan which uses energy con¬ 
servation and efficiency to meet a targeted 700 MW 
of forecasted capacity between 2005 and 2009 
(NWPCC, 2005). 


ES-12 


National Action Plan for Energy Efficiency 











References 


American Council for an Energy-Efficient Economy 
[ACEEE] (2004). A Federal System Benefits Fund: 
Assisting States to Establish Energy Efficiency and 
Other System Benefit Programs. Washington, DC. 
Innovest Strategic Value Advisors [Innovest] (2002, 
October). Energy Management & Investor Returns: 
The Real Estate Sector. 

Kushler, M., Ph.D., York, D., Ph.D., and Witte, P, M.A. 
(2005, January). Examining the Potential for Energy 
Efficiency to Flelp Address the Natural Gas Crisis in 
the Midwest. Washington, DC: American Council 
for an Energy-Efficient Economy [ACEEE], 

Nadel, S. ; Shipley, A., and Elliott, R.N. (2004). The 
Technical, Economic and Achievable Potential for 
Energy Efficiency in the U.S.—A Meta-Analysis of 
Recent Studies. Washington, DC: American Council 
for an Energy-Efficient Economy [ACEEE], 

New York State Energy Research and Development 
Authority [NYSERDA] (2004, May). New York 
Energy $mart SM Program Evaluation and Status 
Report, Report to the System Benefits Charge 
Advisory Group, Final Report. Albany. 

Northeast Energy Efficiency Partnerships [NEEP] (2005, 
May). Economically Achievable Energy Efficiency 
Potential in New England. Optimal Energy. 
Northwest Power and Conservation Council [NWPCC] 
(2005, May). The 5th Northwest Electric Power and 
Conservation Plan, <http://www.nwcouncil.org/ 
energy/powerplan/default.htm> 

Southwest Energy Efficiency Project [SWEEP] (2002, 
November). The New Mother Lode: The Potential 
for More Efficient Electricity Use in the Southwest. 
Report for the Hewlett Foundation Energy Series. 
U.S. Energy Information Administration [EIA] (2006). 

Annual Energy Outlook 2006. Washington, DC. 
Western Governors' Association [WGA] (2006, June). 
Clean Energy, a Strong Economy and a Healthy 
Environment. A Report of the Clean and Diversified 
Energy Advisory Committee. 


For More Information 

Stacy Angel 

U.S. Environmental Protection Agency 
Office of Air and Radiation 
Climate Protection Partnerships Division 
Tel: (202) 343-9606 
E-mail: angel.stacy@epa.gov 

Larry Mansueti 

U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability 

Tel: (202) 586-2588 

E-mail: lawrence.mansueti@hq.doe.gov 

Or visit www.epa.gov/cleanenergy/eeactionplan 


To create a sustainable, aggressive national commitment to energy efficiency 


ES-13 









Introduction 
and Background 



Overview 

We currently face a number of challenges in securing 
affordable, reliable, secure, and clean energy to meet 
our nation's growing energy demand. Demand is out¬ 
pacing supply, costs are rising, and concerns for the envi¬ 
ronment are growing. 

Improving the energy efficiency 1 2 of our homes, business¬ 
es, schools, governments, and industries - which con¬ 
sume more than 70 percent of the energy used in the 
country—is one of the most constructive, cost-effective 
ways to address these challenges. Greater investment in 
energy efficiency programs across the country could help 
meet our growing electricity and natural gas demand, 
save customers billions of dollars on their energy bills, 
reduce emissions of air pollutants and greenhouse gases, 
and contribute to a more secure, reliable, and low-cost 
energy system. Despite this opportunity, energy efficien¬ 
cy remains an under-utilized resource in the nation's 
energy portfolio. 

There are many ways to increase investment in cost- 
effective energy efficiency including developing building 
codes and appliance standards, implementing govern¬ 
ment leadership efforts, and educating the public 
through programs such as ENERGY STAR ®.2 Another 
important area is greater investment in organized ener¬ 
gy efficiency programs that are managed by electric and 
natural gas providers, states, or third-party administra¬ 
tors. Energy efficiency programs already contribute to 
the energy mix in many parts of the country and have 
delivered significant savings and other benefits. Despite 
the benefits, these programs face hurdles in many areas 
of the country. Identifying and removing these barriers is 
a focus of this effort. 


October 2005 

Excerpt from Letter From Co-Chairs to the 
National Action Plan for Energy Efficiency 
Leadership Group 

Energy efficiency is a critically under-utilized resource in 
the nation's energy portfolio. Those states and utilities 
that have made significant investments in energy effi¬ 
ciency have lowered the growth for energy demand and 
moderated their energy costs. However, many hurdles 
remain that block broader investments in cost-effective 
energy efficiency. 

That is why we have agreed to chair the Energy Efficiency 
Action Plan. It is our hope that with the help of leading 
organizations like yours, we will identify and overcome 
these hurdles. 

Through this Action Plan, we intend to identify the major 
barriers currently limiting greater investment by utilities in 
energy efficiency. We will develop a series of business 
cases that will demonstrate the value and contributions 
of energy efficiency and explain how to remove these 
barriers (including regulatory and market challenges). 
These business cases, along with descriptions of leading 
energy efficiency programs, will build upon practices 
already in place across the country. 

Diane Munns Jim Rogers 

President, NARUC President and CEO 

Member, Iowa Utilities Board Duke Energy 

To drive a sustainable, aggressive national commitment 
to energy efficiency through gas and electric utilities, 
utility regulators, and partner organizations, more than 
50 leading organizations joined together to develop this 
National Action Plan for Energy Efficiency. The Action 
Plan is co-chaired by Diane Munns, Member of the Iowa 


1 Energy efficiency refers to using less energy to provide the same or improved level of service to the energy consumer in an economically efficient way. 
The term energy efficiency as used here includes using less energy at any time, including at times of peak demand through demand response and peak 
shaving efforts. 

2 See EPA 2006 for a description of a broad set of policies being used at the state level to advance energy efficiency. 


To create a sustainable, aggressive national commitment to energy efficiency 


1-1 







Utilities Board and President of the National Association 
of Regulatory Utility Commissioners, and Jim Rogers, 
President and Chief Executive Officer of Duke Energy. 
The Leadership Group includes representatives from a 
broad set of stakeholders, including electric and gas 
utilities, state utility commissioners, state air and energy 
agencies, energy service providers, energy consumers, 
and energy efficiency and consumer advocates. This 
effort is facilitated by the U.S. Department of Energy 
(DOE) and the U.S. Environmental Protection Agency 
(EPA). The National Action Plan for Energy Efficiency: 

• Identifies key barriers limiting greater investment in 
energy efficiency, 

• Reviews sound business practices for removing these 
barriers and improving the acceptance and use of ener¬ 
gy efficiency relative to energy supply options, and 

• Outlines recommendations and options for overcoming 
these barriers. 

In addition, members of the Leadership Group are com¬ 
mitting to act within their own organizations and 
spheres of influence to increase attention and invest¬ 
ment in energy efficiency. Greater investment in energy 
efficiency cannot happen based on the work of one indi¬ 
vidual or organization alone. The Leadership Group 
recognizes that the joint efforts of the customer, utility, 
regulator, and partner organizations are needed to rein¬ 
vigorate and increase the use of energy efficiency in 
America. As energy experts, utilities may be in a unique 
position to play a leadership role. 

The rest of this introduction chapter establishes why 
now is the time to increase our investment in energy effi¬ 
ciency, outlines the approach taken in the National 
Action Plan for Energy Efficiency, and explains the struc¬ 
ture of this report. 


Why Focus on Energy Efficiency? 

Energy Challenges 

We currently face multiple challenges in providing 

affordable, clean, and reliable energy in today's complex 

energy markets: 

•Electricity demand continues to rise. Given current 
energy consumption and demographic trends, DOE 
projects that U.S. energy consumption will increase by 
more than one-third by the year 2025. Electric power 
consumption is expected to increase by almost 40 
percent, and total fossil fuel use is projected to 
increase similarly (EIA, 2005). At work and at home, 
we continue to rely on more energy-consuming 
devices. This growth in demand stresses current 
systems and requires substantial new investments in 
system expansions. 

• High energy prices. Our demand for natural gas to 
heat our homes, for industrial and business uses, and 
for power plants is straining the available gas supply in 
North America and putting upward pressure on natu¬ 
ral gas prices. Many household budgets are being 
strained by higher energy costs, leaving less money 
available for other household purchases and needs; 
this situation is particularly harmful for low-income 
households. Consumers are looking for ways to man¬ 
age their energy bills. Higher energy bills for industry 
are reducing the nation's economic competitiveness 
and placing U.S. jobs at risk. Higher energy prices also 
raise the financial risk associated with the develop¬ 
ment of new natural gas-fired power plants, which 
had been expected to make up more than 60 percent 
of capacity additions over the next 20 years (EIA, 
2005). Coal prices are also increasing and contributing 
to higher electricity costs. 

• Energy system reliability Events such as the Northeast 
electricity blackout of August 2003 and Hurricanes 
Katrina and Rita in 2005 highlighted the vulnerability 
of our energy system to disruptions. This led to an 


1-2 National Action Plan for Energy Efficiency 


increased focus on energy reliability and its economic 
and human impacts, as well as national security con¬ 
cerns using fossil fuel more efficiently and increasing 
energy supply diversity. 

• Transmission systems are overburdened in some places, 
limiting the flow of economical generation and, in 
some cases, shrinking reserve margins of the electricity 
grid to inappropriately small levels. This situation can 
cause reliability problems and high electricity prices in 
or near congested areas. 

• Environmental concerns. Energy demand continues to 
grow as national and state regulations are being imple¬ 
mented to significantly limit the emissions of air pollu¬ 
tants, such as sulfur dioxide (S0 2 ), nitrogen oxides (NO x ), 
and mercury, to protect public health and the environ¬ 
ment. Many existing base load generation plants are 
aging and significant retrofits are needed to ensure old 
generating units meet these emissions regulations. 
In addition, emissions of greenhouse gases continue 
to increase. 

Addressing these issues will require billions of dollars in 
investments in new power plants, gas rigs, transmission 
lines, pipelines, and other infrastructure, notwithstand¬ 
ing the difficulty of building new energy infrastructure in 
dense urban and suburban locations even with current 
energy efficiency investment. The decisions we make 
now regarding our energy supply and demand can either 
help us deal with these challenges more effectively or 
complicate our ability to secure a more stable, economi¬ 
cal energy future. 

Benefits of Energy Efficiency 

Greater investment in energy efficiency can help us tackle 
these challenges. Energy efficiency is already a key compo¬ 
nent in the nation's energy resource mix in many parts of 


the country, and experience shows that energy efficiency 
programs can lower customer energy bills; cost less than, 
and help defer, new energy production; provide environ¬ 
mental benefits; and spur local economic development. 
Some of the major benefits of energy efficiency include: 

•Lower energy bills, greater customer control, and 
greater customer satisfaction. Well-designed programs 
can provide opportunities for all customer classes to 
adopt energy savings measures and reduce their ener¬ 
gy bills. 3 These programs can help customers make 
sound energy use decisions, increase control over their 
energy bills with savings of 5 to 30 percent, and 
empower them to manage their energy usage. 
Customers often express greater satisfaction with elec¬ 
tricity and natural gas providers where energy efficien¬ 
cy is offered. 

• Lower cost than supplying new generation only from 
new power plants. Well-designed energy efficiency 
programs are saving energy at an average cost of one- 
half of the typical cost of new power sources and 
about one-third of the cost of providing natural gas. 4 
When integrated into a long-term energy resource 
plan, energy efficiency could help defer investments in 
new plants and lower the total energy system cost. 

• Modular and quick to deploy. Energy efficiency pro¬ 
grams can be ramped up over a period of one to three 
years to deliver sizable savings. These programs can 
also be targeted to congested areas with high prices to 
bring relief where it might be difficult to deliver new 
supply in the near term. 

• Significant energy savings. Well-designed energy effi¬ 
ciency programs are delivering energy savings each 
year on the order of 1 percent of total electric and nat¬ 
ural gas sales. 5 These programs are helping to offset 
20 to 50 percent of expected growth in energy 


3 See Chapter 6: Energy Efficiency Program Best Practices for more information on leading programs. 

4 Based on new power costs and gas prices in 2015 (EIA, 2006) compared to electric and gas program costs based on leading energy programs, many of 
which are discussed in Chapter 6: Energy Efficiency Program Best Practices. 

3 Based on leading energy efficiency programs, many of which are discussed in Chapter 6: Energy Efficiency Program Best Practices. 


To create a sustainable, aggressive national commitment to energy efficiency 


1-3 



demand in some areas without compromising the end 
users' activities and economic well-being (Nadel, et al., 
2004; EIA, 2006). 

• Environmental benefits. Cost-effective energy efficien¬ 
cy offers environmental benefits related to reduced 
demand, such as reduced air pollution and greenhouse 
gas emissions, lower water use, and less environmental 
damage from fossil fuel extraction. Energy efficiency is 
an attractive option for generation owners in advance 
of requirements to reduce greenhouse gas emissions. 

•Economic development. Greater investment in energy 
efficiency helps build jobs and improve state economies. 
Energy efficiency users often redirect their bill savings 
toward other activities that increase local and national 
employment, with a higher employment impact than if 
the money had been spent to purchase energy (York 
and Kushler, 2005; NYSERDA, 2004). Many energy effi¬ 
ciency programs create construction and installation 
jobs, with multiplier impacts on other employment and 
local economies (Sedano et al., 2005). Local invest¬ 
ments in energy efficiency can offset energy imports 
from out-of-state, improving the state balance of trade. 
Lastly, energy efficiency investments usually create long- 
lasting infrastructure changes to building, equipment 
and appliance stocks, creating long-term property 
improvements that deliver long-term economic value 
(Innovest, 2002). 

• Energy security. Energy efficiency reduces the level of 
U.S. per capita energy consumption, thus decreasing 
the vulnerability of the economy and individual con¬ 
sumers to energy price disruptions from natural disasters 
and attacks upon domestic and international energy 
supplies and infrastructure. 

Decades of Experience With Energy 
Efficiency 

Utilities and their regulators began recognizing the 
potential benefits of improving efficiency and reducing 
demand in the 1970s and 1980s. These "demand-side 


Long Island Power Authority's (LIPA) 
Clean Energy Program Drives Economic 
Development, Customer Savings, and 
Environmental Quality Enhancements 

LIPA started its Clean Energy Initiative in 1999 and 
has invested $229 million over the past 6 years. 
LIPA's portfolio of energy efficiency programs from 
1999 to 2005 produced significant energy savings, 
emissions reductions and stimulated economic 
growth on Long Island: 

• 296 megawatts (MW) peak demand savings 

• 1,348 gigawatt-hours (GWh) cumulative savings 

• Emissions reductions of: 

• Greater than 937,402 tons of 
carbon dioxide (C0 2 ) 

• Greater than 1,334 tons of NO x 

• Greater than 4,298 tons of S0 2 

• $275 million in customer bill savings and rebates 

• $234 million increase in net economic output on 
Long Island 

•4,500 secondary jobs created 

Source: LIPA, 2006 

management" (DSM) approaches meet increased 
demands for electricity or natural gas by managing the 
demand on the customer's side of the meter rather than 
increasing or acquiring more supplies. Planning processes, 
such as "least-cost planning" or "integrated resource 
planning," have been used to evaluate DSM programs 
on par with supply options and allow investment in 
DSM programs when they cost less than new supply 
options. 

DSM program spending exceeded $2 billion a year (in 
2005 dollars) in 1993 and 1994 (York and Kushler, 
2005). In the late 1990s, funding for utility-sponsored 
energy efficiency was reduced in about half of the states 
due to changed regulatory structures and increased 
political and regulatory pressures to hold down electrici¬ 
ty prices. This funding has partially recovered with new 


1 -4 National Action Plan for Energy Efficiency 


policies and funding mechanisms (see Figure 1-1) imple¬ 
mented to ensure that some level of cost-effective 
energy efficiency was pursued. 

Notwithstanding the policy and regulatory changes that 
have affected energy efficiency program funding, wide 
scale, organized energy efficiency programs have now 
been operating for decades in certain parts of the coun¬ 
try. These efforts have demonstrated the following: 

• Energy efficiency programs deliver significant savings. 

In the mid-1990s, based on the high program funding 
levels of the early 1990s, electric utilities estimated pro¬ 
gram savings of 30 gigawatts (the output of about 100 
medium-sized power plants) and more than 60 million 
megawatt-hours (MWh). 

• Energy efficiency programs can be used to meet a sig¬ 
nificant portion of expected load growth. For example: 

— The Pacific Northwest region has met 40 percent 
of its growth over the past two decades through 
energy efficiency programs (see Figure 1-2). 

— California's energy efficiency goals, adopted in 
2004 by the Public Utilities Commission, are to 


Puget Sound Energy's (PSE) Resource 
Plan Includes Accelerated Conservation 
to Minimize Risks and Costs 

PSE's 2002 and 2005 Integrated Resource Plans 
(IRPs) found that the accelerated development of 
energy efficiency minimizes both costs and risks. 
As a result, PSE significantly expanded its energy 
efficiency efforts. PSE is now on track to save 279 
average MW (aMW) between 2006 and 2015, 
more than the company had saved between 1980 
and 2004. The 279 aMW of energy efficiency rep¬ 
resents nearly 10 percent of its forecasted 2015 
sales. 

Source: Puget Sound Energy, 2005 


Connecticut's Energy Efficiency Programs 
Generate Savings of $550 Million in 2005 

In 2005, the Connecticut Energy Efficiency 
Fund, managed by the Energy Conservation 
Management Board, invested $80 million in ener¬ 
gy efficiency. This investment is expected to pro¬ 
duce $550 million of bill savings to Connecticut 
electricity consumers. In addition, the 2005 pro¬ 
grams, administered by Northeast Utilities and 
United Illuminating, resulted in: 

• 126 MW peak demand reduction 
•4,398 GWh lifetime savings 

• Emissions reductions of: 

— Greater than 2.7 million tons of C0 2 

— Greater than 1,702 tons of NO x 

— Greater than 4,616 tons of S0 2 

•1,000 non-utility jobs in the energy efficiency 
industry 

Source: CECMB, 2006 


Figure 1-1: Energy Efficiency Spending Has Declined 



Year 


Source: Data derived from ACEEE 2005 Scorecard (York and Kushler, 
2005) adjusted for inflation using U.S. Department of Labor Bureau of 
Labor Statistics Inflation Calculator 


To create a sustainable, aggressive national commitment to energy efficiency 


1-5 




































































use energy efficiency to displace more than half of 
future electricity load growth and avoid the need 
to build three large (500 MW) power plants. 

• Energy efficiency is being delivered cost-competitively 
with new supply Programs across the country are 
demonstrating that energy efficiency can be delivered 
at a cost of 2 to 4 cents per kilowatt-hour (kWh) and a 
cost of $1.30 to $2.00 per lifetime million British ther¬ 
mal units (MMBtu) saved. 

•Energy efficiency can be targeted to reduce peak 
demand. A variety of programs address the peak 
demand of different customer classes, lowering the 
strain on existing supply assets (e.g., pipeline capacity, 
transmission and distribution capacity, and power plant 
capability), allowing energy delivery companies to bet¬ 
ter utilize existing assets and deferring new capital 
investments. 

• Proven, cost-effective program models are available to 
build upon. These program models are available for 
almost every customer class, both gas and electric. 

Southern California Edison's (SCE) 

Energy Efficiency Investments Provide 
Economic and Environmental Savings 

SCE's comprehensive portfolio of energy efficiency 

programs for 2006 through 2008 will produce: 

•3 percent average bill reduction by 2010 

• 3.5 billion kWh of energy savings 

• 888 MW of demand savings 

•20.5 million tons of C0 2 emission reductions 

• 5.5 million tons of NO x emission reductions 

• Energy saved at a cost of less than 4.1 cents/kWh 

Source: Southern California Edison, 2006 


New York State's Aggressive 
Energy Efficiency Programs Help 
Power the Economy As Well As Reduce 
Energy Costs 

New York State Energy Research and Development 
Authority's (NYSERDA's) portfolio of energy efficiency 
programs for the period from 1999 to 2005 pro¬ 
duced significant energy savings, as well as stimu¬ 
lated economic growth and jobs, and reduced energy 
prices in the state: 

• 19 billion kWh/year of energy savings 

•4,166 added jobs/year (created/retained) from 
1999 to 2017 

• $244 million/year in added total economic growth 
from 1999 to 2017 

•$94.5 million in energy price savings over three 
years 

Source: NYSERDA, 2006 

National Case for Energy Efficiency 

Improving the energy efficiency of homes, businesses, 
schools, governments, and industries—which consume 
more than 70 percent of the energy used in the country — 
is one of the most constructive, cost-effective ways to 
address the nation's energy challenges. Many of these 
buildings and facilities are decades old and will consume the 
majority of the energy to be used in these sectors for years 
to come. State and regional studies have found that adop¬ 
tion of economically attractive, but as yet untapped, energy 
efficiency could yield more than 20 percent savings in total 
electricity demand nationwide by 2025. Depending on the 
underlying load growth, these savings could help cut load 
growth by half or more compared to current forecasts 
(Nadel et al„ 2004; SWEEP, 2002; NEEP, 2005; NWPCC, 
2005; WGA, 2006). Similarly, energy efficiency targeted at 
direct natural gas use could lower natural gas demand 
growth by 50 percent (Nadel et al., 2004). Furthermore, 
studies also show that significant reductions in energy 
consumption can be achieved quickly (Callahan, 2006) and 
at low costs for many years to come. 


1 -6 National Action Plan for Energy Efficiency 




Figure 1-2: Energy Efficiency Has Been a Resource in the Pacific Northwest for the Past Two Decades 


Pacific Northwest Energy Efficiency 
Achievements 1978 - 2004 


a: 


Since 1978, Bonneville Power 
Administration (BPA) & Utility 
Programs, Energy Codes & Federal 
Efficiency Standards Have Produced 
Nearly 3000 aMW of Savings. 


i i i i i i i i i i i i i i i i i i i i I I I 

1978 1982 1986 1990 1994 1998 2002 


■ BPA and Utility Programs State Codes 

■ Alliance Programs ■ Federal Standards 


Source: Eckman, 2005 


Capturing this energy efficiency resource would offer 
substantial economic and environmental benefits across 
the country. Widespread application of energy efficiency 
programs that already exist in some regions 6 could deliv¬ 
er a large part of these potential savings. Extrapolating 
the results from existing programs to the entire country 
would yield over the next 10 to 15 years 7 : 

•Energy bill savings of nearly $20 billion annually. 

•Net societal benefits of more than $250 billion. 8 9 

•Avoided need for 20,000 MW (40 new 500 MW- 
power plants). 


Energy Efficiency Met Nearly 40 Percent of Pacific 
Northwest Regional Firm Sales Growth Between 1980 
to 2003 



• Avoided annual air emissions of more than 200 million 
tons of C0 2 , 50,000 tons of S0 2 , and 40,000 tons of NO x . 

These benefits illustrate the magnitude of the benefits 
cost-effective energy efficiency offers. They are estimated 
based on (1) assumptions of average program spending 
levels by utilities or other program administrators that 
currently sponsor energy efficiency programs and 
(2) conservatively high estimates for the cost of the energy 
efficiency programs themselves (see Table 1-1)9 They are 
not meant as a prescription; there are differences in 
opportunities and costs for energy efficiency that need 
to be addressed at the regional, state, and utility level to 
design and operate effective programs. 


6 See highlights of some of these programs in Chapter 6: Energy Efficiency Program Best Practices, Tables 6-1 and 6-2. 

7 These economic and environmental savings estimates extrapolate the results from regional programs to a national scope. Actual savings at the region¬ 
al level vary based on a number of factors. For these estimates, avoided capacity value is based on peak load reductions de-rated for reductions that 
do not result in savings of capital investments. Emission savings are based on a marginal on-peak generation fuel of natural gas and marginal off-peak 
fuel of coal; with the on-peak period capacity requirement double that of the annual average. These assumptions vary by region based upon situation- 
specific variables. Reductions in capped emissions might reduce the cost of compliance. 

8 Net present value (NPV) assuming 5 percent discount rate. 

9 This estimate of the funding required assumes 2 percent of revenues across electric utilities and 0.5 percent across gas utilities. The estimate also 
assumes that energy efficiency is delivered at a total cost (utility and participant) of $0.04 per kWh and $3 per MMBtu, which are higher than the costs 
of many of today's programs. 


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Table 1-1. Summary of Benefits for National Energy Efficiency Efforts 


Program Cost 

Electric 

Natural Gas 

Total 

Utility Program Spending (% of utility revenue) 

2 . 0 % 

0 . 5 % 


Total Cost of Efficiency (customer & utility) 

$35/MWh 

$3/MMBtu 


Cost of Efficiency (customer) 

$15/MWh 

$2/MMBtu 


Average Annual Cost of Efficiency ($MM) 

$6,800 

$1,200 


Total Cost of Efficiency (NPV, $MM) 

$140,000 

$25,000 

$165,000 

Efficiency Spending (NPV, $MM) - Customer 

$60,000 

$13,000 

$73,000 

Efficiency Program Spending (NPV, $MM) - Utility 

$80,000 

$13,000 

$93,000 

Resulting Savings 

Electric 

Natural Gas 

Total 

Net Customer Savings (NPV, $MM) 

$277,000 

$76,500 

$353,500 

Annual Customer Savings ($MM) 

$18,000 

$5,000 

$23,000 

Net Societal Savings (NPV, $MM) 

$270,000 

$74,000 

$344,000 

Annual Net Societal Savings ($MM) 

$17,500 

$5,000 

$22,500 

Decrease in Revenue Requirement (NPV, $MM) 

$336,000 

$89,000 

$425,000 

Annual Decrease in Revenue Requirement ($MM) 

$22,000 

$6,000 

$28,000 

Energy Savings 

Electric 

Natural Gas 

Total 

% of Growth Saved - Year 15 

61% 

52% 


% of Consumption Saved - Year 15 

12% 

5% 


Peak Load Reduction (de-rated) 1 - Year 15 

34,000 MW 



Energy Saved - Year 15 

588,000 GWh 

1,200 BcF 


Energy Saved (cumulative) 

9,400,000 GWh 

19,000 BcF 


Emission Reductions 

Electric 

Natural Gas 

Total 

CO 2 Emission Reduction (1,000 tons) - Year 15 

338,000 

72,000 

410,000 

NOx Emission Reduction (tons) - Year 15 

67,000 

61,000 

128,000 

Other Assumptions 

Electric 

Natural Gas 


Load Growth (%) 

2 % 

1 % 


Utility NPV Discount Rate (%) 

5% 

5% 


Customer NPV Discount Rate (%) 

5% 

5% 


EE Project Life Term (years) 

15 

15 



Source: Energy Efficiency Benefits Calculator developed for the National Action Plan for Energy Efficiency, 2006. 

BcF = billion cubic feet; CC >2 = carbon dioxide; EE = energy efficiency; GWh = gigawatt-hour; kWh = kilowatt-hour; $MM = million dollars; MMBtu = million 
British thermal units; MW = megawatt; MWh = megawatt-hour; N/A = not applicable; NO x = nitrous oxides; NPV = net present value. 
i De-rated peak load reduction based on the coincident peak load reduced multiplied by the percent of growth-related capital expenditures that are 
saved. Peak load reductions in unconstrained areas are not counted. 


1 -8 National Action Plan for Energy Efficiency 





































As a nation we are passing up these savings by sub¬ 
stantially underinvesting in energy efficiency. One indi¬ 
cator of this underinvestment is the level of energy 
efficiency program funding across the country. Based 
on the effectiveness of current energy efficiency pro¬ 
grams operated in certain parts of the country, the 
funding necessary to yield the economic and environ¬ 
mental benefits presented above is approximately four 
times the funding levels for organized efficiency pro¬ 
grams today (less than $2 billion per year). Again, this 
is one indicator of underinvestment and not meant to 
be a national funding target. Appropriate funding levels 
need to be established at the regional, state, or utility 
level based on the cost-effective potential for energy 
efficiency as well as other factors. 

The current underinvestment in energy efficiency is due 
to a number of well-recognized barriers. Some key bar¬ 
riers arise from choices concerning regulation of electric 
and natural gas utilities. These barriers include: 

• Market barriers, such as the well-known "split-incen¬ 
tive" barrier, which limits home builders' and commer¬ 
cial developers' motivation to invest in new building 
energy efficiency because they do not pay the energy 
bill, and the transaction cost barrier, which chronically 
affects individual consumer and small business 
decision-making. 

• Customer barriers, such as lack of information on ener¬ 
gy saving opportunities, lack of awareness of how 
energy efficiency programs make investments easier 
through low-interest loans, rebates, etc., lack of time 
and attention to implementing efficiency measures, 
and lack of availability of necessary funding to invest in 
energy efficiency. 


•Public policy barriers, which often discourage efficien¬ 
cy investments by electric and natural gas utilities, 
transmission and distribution companies, power pro¬ 
ducers and retail electric providers. Historically these 
organizations have been rewarded more for building 
infrastructure (e.g., power plants, transmission lines, 
pipelines) and increasing energy sales than for helping 
their customers use energy wisely even when the energy¬ 
saving measures might cost less. 10 

• Utility, state, and region planning barriers, which do 
not allow energy efficiency to compete with supply- 
side resources in energy planning. 

• Energy efficiency program barriers, which limit invest¬ 
ment due to lack of knowledge about the most effec¬ 
tive and cost-effective energy efficiency program 
portfolios, programs for overcoming common market 
barriers to energy efficiency, or available technologies. 

While a number of energy efficiency policies and pro¬ 
grams contribute to addressing these barriers such as 
building codes, appliance standards, and state govern¬ 
ment leadership programs, energy efficiency programs 
organized through electricity and gas providers also 
encourage greater energy efficiency in the homes, 
buildings, and facilities that exist today that will con¬ 
sume the majority of the energy used in these sectors 
for years to come. 


10 Many energy efficiency programs have an average lifecycle cost of $0.03/kWh saved, which is 50-75% of the typical cost of new power sources 
(ACEEE, 2004; EIA, 2006). 


To create a sustainable, aggressive national commitment to energy efficiency 


1-9 



The National Action Plan for Energy 
Efficiency 

To drive a sustainable, aggressive national commitment 
to energy efficiency through gas and electric utilities, 
utility regulators, and partner organizations, more than 
50 leading organizations joined together to develop this 
National Action Plan for Energy Efficiency. The Leadership 
Group members (Table 1-2) have developed this National 
Action Plan for Energy Efficiency Report, which: 

• Reviews the barriers limiting greater investment in 
energy efficiency by gas and electric utilities and part¬ 
ner organizations. 

• Presents sound business strategies that are available to 
overcome these barriers. 

•Documents a set of business cases showing the 
impacts on key stakeholders as utilities under different 
circumstances increase energy efficiency programs. 

• Presents best practices for energy efficiency program 
design and operation. 

• Presents policy recommendations and options for 
spurring greater investment in energy efficiency by util¬ 
ities and energy consumers. 

The report chapters address four main policy and pro¬ 
gram areas (see Figure 1-3): 

• Utility Ratemaking and Revenue Requirements. Lost 
sales from the expanded use of energy efficiency have 
a negative effect on the financial performance of elec¬ 
tric and natural gas utilities, particularly those that are 
investor-owned under conventional regulation. Cost- 
recovery strategies have been designed and imple¬ 
mented to successfully "decouple" utility financial 
health from electricity sales volumes to remove finan¬ 
cial disincentives to energy efficiency, and incentives 
have been developed and implemented to make ener¬ 
gy efficiency investments as financially rewarding as 
capital investments. 


The goal of the National Action Plan for 
Energy Efficiency is to create a sustain¬ 
able, aggressive national commitment 
to energy efficiency through gas and 
electric utilities, utility regulators, and 
partner organizations. 

The Leadership Group: 

• Recognizes that utilities and regulators have criti¬ 
cal roles in creating and delivering energy efficien¬ 
cy programs to their communities. 

• Recognizes that success requires the joint efforts 
of the customer, utility, regulator, and partner 
organizations. 

•Will work across their spheres of influence to 
remove barriers to energy efficiency. 

•Commits to take action within their own organi¬ 
zation to increase attention and investment in 
energy efficiency. 

Leadership Group Recommendations: 

• Recognize energy efficiency as a high-priority 
energy resource. 

• Make a strong, long-term commitment to imple¬ 
ment cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and oppor¬ 
tunities for energy efficiency. 

• Promote sufficient, timely, and stable program 
funding to deliver energy efficiency where cost- 
effective. 

• Modify policies to align utility incentives with the 
delivery of cost-effective energy efficiency and 
modify ratemaking practices to promote energy 
efficiency investments. 


1-10 National Action Plan for Energy Efficiency 




• Planning Processes. Energy efficiency, along with other 
customer-side resources, are not fully integrated into 
state and utility planning processes that identify the 
need to acquire new electricity and natural gas 
resources. 

•Rate Design. Some regions are successfully using rate 
designs such as time-of-use (TOU) or seasonal rates to 
more accurately reflect the cost of providing electricity 
and to encourage customers to consume less energy. 

• Energy Efficiency Program Best Practices Documentation. 

One reason given for slow adoption of energy efficiency 


is a lack of knowledge about the most effective and 
cost-effective energy efficiency program options. 
However, many states and electricity and gas providers 
are successfully operating energy efficiency programs 
across end-use sectors and customer classes, including 
residential, commercial, industrial, low-income, and 
small business. These programs employ a variety of 
approaches, including providing public information 
and training, offering financing and financial incen¬ 
tives, allowing energy savings bidding, and offering 
performance contracting. 


Figure 1-3: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency 



. Utility Resource 

Program 

Policy Structure 

Planning 

Implementation 

Develop Utility Incentives 
for Energy Efficiency 

Include Energy Efficiency 
in Utility Resource Mix 

Program Roll-out 

Develop Rate Designs to 
Encourage Energy Efficiency 

Develop Effective Energy 
Efficiency Programs 

Measurement & Evaluation 

1 

t 


Revise Plans and Policies Based on Results 


Action Plan Report Chapter Areas and Key Barriers 


Utility Ratemaking 
& Revenue 
Requirements 

D Plannin9 Rate Design 

Processes 

Model 

Program 

Documentation 

Energy efficiency reduces 
utility earnings 

Planning does not 
incorporate demand- 
side resources 

Rates do not 
encourage energy 
efficiency investments 

Limited information on 
existing best practices 


To create a sustainable, aggressive national commitment to energy efficiency 


1-11 



















Business Cases for Energy Efficiency 

A key element of the National Action Plan for Energy 
Efficiency is exploring the benefits of energy efficiency 
and the mechanisms and policies that might need to be 
modified so that each of the key stakeholders can bene¬ 
fit from energy efficiency investments. A key issue is that 
adoption of energy efficiency saves resources and utility 
costs, but also reduces utility sales. Therefore, the effect 
on utility financial health must be carefully evaluated. To 
that end, the Leadership Group offers an Energy 
Efficiency Benefits Calculator (Calculator) that evaluates 
the financial impact of energy efficiency on its major 
stakeholders—utilities, customers, and society. The 


Calculator allows stakeholders to examine different effi¬ 
ciency and utility cases with transparent input assump¬ 
tions. 

The business cases presented in Chapter 4 of this report 
show the impact of energy efficiency investments upon 
sample utility's financial health and earnings, upon cus¬ 
tomer energy bills, and upon social resources such as 
net efficiency costs and pollutant emissions. In general, 
the impacts of offering energy efficiency programs ver¬ 
sus not offering efficiency follow the trends and find¬ 
ings illustrated below from the customer, utility and 
society perspectives. 


Utility Perspective. Energy efficiency affects utility revenues, shareholder earnings, and costs associated with capital 
investments. The utility can be financially neutral to investments in energy efficiency, at a minimum, or encourage 
greater investment through the implementation of a variety of decoupling, ratemaking, and incentives policies. 
These policies can ensure that shareholder returns and earnings could be the same or increased. Utility investment 
in infrastructure and contractual obligations for energy procurement could be reduced, providing a favorable 
balance sheet impact. 


Utility Returns - No Change or Increase 

Utility earnings remain stable or increase if decoupling or the use of shareholder incen¬ 
tives accompanies an energy efficiency program. Without incentives, earnings might be 
lower because effective energy efficiency will reduce the utility's sales volume and 
reduce the utility's rate base, and thus the scope of its earnings. 


Change in Utility Earnings - Results Vary 

Depending on the inclusion of decoupling and/or shareholder incentives, utility earn¬ 
ings vary. Utility earnings increase if decoupling or shareholder incentives are included. 
If no incentives, earnings might be lower due to reduced utility investment. 


Peak Load Growth and Associated Capital Investment - Decreases 

Capital investments in new resources and energy delivery infrastructure are reduced 
because peak capacity savings are captured due to energy efficiency measures. 


Customer Perspective. Customers' overall bills will decrease with energy efficiency because lower energy usage 
offsets potential rate increases to cover the cost of offering the efficiency program. 

Customer Bills - Decrease 

Total customer bills decline over time as a result of investment in cost-effective energy 
efficiency programs as customers save due to lower energy consumption. This decline 
follows an initial rise in customer bills reflecting the cost of energy efficiency programs, 
which will then reduce costs over many years. 





1-12 National Action Plan for Energy Efficiency 



























Customer Perspective (continued) 


Customer Rates - Mild Increase 12 

Rates might increase slightly to cover the cost of the energy efficiency program. 


Community or Society Perspective. From a broad community/society perspective, energy efficiency produces real sav¬ 
ings over time. While initially, energy efficiency can raise energy costs slightly to finance the new energy efficiency 
investment, the reduced bills (as well as price moderation effects) provide a rapid payback on these investments, 
especially compared to the ongoing costs to cover the investments in new energy production and delivery infrastruc¬ 
ture costs. Moreover, the environmental benefits of energy efficiency continue to grow. The Calculator evaluates the 
net societal savings, utility savings, emissions reductions, and the avoided growth in energy demand associated with 
energy efficiency. 


Net Resources Savings - Increases 

Over time, as energy efficiency programs ramp up, cumulative energy efficiency sav¬ 
ings lead to cost savings that exceed the energy efficiency program cost. 


Total Resource Cost (TRC) per Unit - Declines 

Total cost of providing each unit of energy (MWh, MMBtu gas) declines over time 
because of the impacts of energy savings, decreased peak load requirements, and 
decreased costs during peak periods. Well-designed energy efficiency programs can 
deliver energy at an average cost less than that of new power sources. 


Emissions and Cost Savings - Increases 

Efficiency prevents or avoids producing many annual tons of emissions and emission 
control costs. 


Growth Offset by EE - Increases 

As energy efficiency programs ramp up, the percent of growth that is offset by energy 
efficiency climbs and then levels as cumulative savings as a percent of demand growth 
stabilizes. 







12 The changes shown in the business cases indicate a change from what would have otherwise occurred. This change does not include a one-time infra¬ 
structure investment in the assumptions, but it does include smooth capital expenditures. Energy efficiency will moderate prices of fossil fuels. The fuel 
price reductions from an aggressive energy efficiency program upon fuel prices have not been included and could result in an overall rate reduction. 


To create a sustainable, aggressive national commitment to energy efficiency 


1-13 




























About This Report 

The National Action Plan for Energy Efficiency is struc¬ 
tured as follows: 

Chapter 2: Utility Ratemaking & Revenue Requirements 

• Reviews mechanisms for removing disincentives for 
utilities to consider energy efficiency. 

• Reviews the pros and cons for different strategies to 
reward utility energy efficiency performance, including 
the use of energy efficiency targets, shared savings 
approaches, and shareholder/company performance 
incentives. 

• Reviews various funding options for energy efficiency 
programs. 

• Presents recommendations and options for modifying 
policies to align utility incentives with the delivery of 
cost-effective energy efficiency and providing for suffi¬ 
cient and stable program funding to deliver energy effi¬ 
ciency where cost effective. 

Chapter 3: Energy Resource Planning Processes 

•Reviews state and regional planning approaches, 
including Portfolio Management and Integrated 
Resource Planning, which are being used to evaluate a 
broad array of supply and demand options on a level 
playing field in terms of their ability to meet projected 
energy demand. 

• Reviews methods to quantify and simplify the value 
streams that arise from energy efficiency investments— 
including reliability enhancement/congestion relief, peak 
demand reductions, and greenhouse gas emissions 
reductions—for direct comparison to supply-side options. 

• Presents recommendations and options for making a 
strong, long-term commitment to cost-effective energy 
efficiency as a resource. 


Chapter 4: Business Case for Energy Efficiency 

•Outlines the business case approach used to examine 
the financial implications of enhanced energy efficien¬ 
cy investment on utilities, consumers, and society. 

• Presents case studies for eight different electric and 
natural gas utility situations, including different owner¬ 
ship structures, gas and electric utilities, and different 
demand growth rates. 

Chapter 5: Rate Design 

• Reviews a variety of rate design structures and their 
effect in promoting greater investment in energy effi¬ 
ciency by the end-user. 

•Presents recommended strategies that encourage 
greater use of energy efficiency through rate design. 

Chapter 6: Energy Efficiency Program Best Practices 

• Reviews and presents best practices for operating suc¬ 
cessful energy efficiency programs at a portfolio level, 
addressing issues such as assessing energy efficiency 
potential, screening energy efficiency programs for 
cost-effectiveness, and developing a portfolio of 
approaches. 

• Provides best practices for successful energy efficiency 
programs across end-use sectors, customer classes, and 
a broad set of approaches. 

• Documents the political and administrative factors that 
lead to program success. 

Chapter 7: Report Summary 

•Summarizes the policy and program recommendations 
and options. 


1-14 National Action Plan for Energy Efficiency 


For More Information 


Visit the National Action Plan for Energy Efficiency 
Web site: www.epa.gov/deanenergy/eeactionplan.htm 
or contact: 

Stacy Angel 

U.S. Environmental Protection Agency 
Office of Air and Radiation 
Climate Protection Partnerships Division 
Angel.Stacy@epa.gov 

Larry Mansueti 

U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability 

Lawrence.Mansueti@hq.doe.gov 


To create a sustainable, aggressive national commitment to energy efficiency 






Table 1 -2. Members of the National Action Plan for Energy Efficiency 

Co-Chairs 

Diane Munns 

Member 

Iowa Utilities Board 


President 

National Association of Regulatory Utility Commissioners 

Jim Rogers 

President and Chief Executive Officer 

Duke Energy 

Leadership Group 


Barry Abramson 

Senior Vice President 

Servidyne Systems, LLC 

Angela S. Beehler 

Director of Energy Regulation 

Wal-Mart Stores, Inc. 

Bruce Braine 

Vice President, Strategic Policy Analysis 

American Electric Power 

Jeff Burks 

Director of Environmental Sustainability 

PNM Resources 

Kateri Callahan 

President 

Alliance to Save Energy 

Glenn Cannon 

General Manager 

Waverly Light and Power 

Jorge Carrasco 

Superintendent 

Seattle City Light 

Lonnie Carter 

President and Chief Executive Officer 

Santee Cooper 

Mark Case 

Vice President for Business Performance 

Baltimore Gas and Electric 

Gary Connett 

Manager of Resource Planning and 

Member Services 

Great River Energy 

Larry Downes 

Chairman and Chief Executive Officer 

New Jersey Natural Gas 

(New Jersey Resources Corporation) 

Roger Duncan 

Deputy General Manager, Distributed Energy Services 

Austin Energy 

Angelo Esposito 

Senior Vice President, Energy Services and Technology 

New York Power Authority 

William Flynn 

Chairman 

New York State Public Service Commission 

Jeanne Fox 

President 

New Jersey Board of Public Utilities 

Anne George 

Commissioner 

Connecticut Department of Public Utility Control 

Dian Grueneich 

Commissioner 

California Public Utilities Commission 

Blair Hamilton 

Policy Director 

Vermont Energy Investment Corporation 

Leonard Haynes 

Executive Vice President, Supply Technologies, 
Renewables, and Demand Side Planning 

Southern Company 

Mary Healey 

Consumer Counsel for the State of Connecticut 

Connecticut Consumer Counsel 

Helen Howes 

Vice President, Environment, Health and Safety 

Exelon 

Chris James 

Air Director 

Connecticut Department of Environmental Protection 

Ruth Kinzey 

Director of Corporate Communications 

Food Lion 

Peter Lendrum 

Vice President, Sales and Marketing 

Entergy Corporation 

Rick Leuthauser 

Manager of Energy Efficiency 

MidAmerican Energy Company 

Mark McGahey 

Manager 

Tristate Generation and Transmission Association, Inc. 

Janine Migden- 
Ostrander 

Consumers' Counsel 

Office of the Ohio Consumers' Counsel 

Richard Morgan 

Commissioner 

District of Columbia Public Service Commission 

Brock Nicholson 

Deputy Director, Division of Air Quality 

North Carolina Air Office 

Pat Oshie 

Commissioner 

Washington Utilities and Transportation Commission 

Douglas Petitt 

Vice President, Government Affairs 

Vectren Corporation 



1-16 National Action Plan for Energy Efficiency 





Bill Prindle 
Phyllis Reha 
Roland Risser 
Gene Rodrigues 
Art Rosenfeld 
Jan Schori 
Larry Shirley 
Michael Shore 
Gordon Slack 
Deb Sundin 
Dub Taylor 

Paul von 
Paumgartten 

Brenna Walraven 
Devra Wang 
Steve Ward 
Mike Weedall 
Tom Welch 
Jim West 
Henry Yoshimura 


Deputy Director 
Commissioner 

Director, Customer Energy Efficiency 

Director, Energy Efficiency 

Commissioner 

General Manager 

Division Director 

Senior Air Policy Analyst 

Energy Business Director 

Director, Business Product Marketing 

Director 

Director, Energy and Environmental Affairs 

Executive Director, National Property Management 
Director, California Energy Program 
Public Advocate 

Vice President, Energy Efficiency 

Vice President, External Affairs 

Manager of energy right & Green Power Switch 

Manager, Demand Response 


Observers 

James W. (Jay) 
Brew 

Roger Cooper 
Dan Delurey 
Roger Fragua 
Jeff Genzer 
Donald Gilligan 
Chuck Gray 

John Holt 
Joseph Mattingly 
Kenneth Mentzer 
Christina Mudd 
Ellen Petrill 
Alan Richardson 
Steve Rosenstock 
Diane Shea 
Rick Tempchin 
Mark Wolfe 


Counsel 

Executive Vice President, Policy and Planning 

Executive Director 

Deputy Director 

General Counsel 

President 

Executive Director 

Senior Manager of Generation and Fuel 

Vice President, Secretary and General Counsel 

President and Chief Executive Officer 

Executive Director 

Director, Public/Private Partnerships 

President and Chief Executive Officer 

Manager, Energy Solutions 

Executive Director 

Director, Retail Distribution Policy 

Executive Director 


American Council for an Energy-Efficient Economy 

Minnesota Public Utilities Commission 

Pacific Gas and Electric 

Southern California Edison 

California Energy Commission 

Sacramento Municipal Utility District 

North Carolina Energy Office 

Environmental Defense 

The Dow Chemical Company 

Xcel Energy 

Texas State Energy Conservation Office 
Johnson Controls 

USAA Realty Company 
Natural Resources Defense Council 
State of Maine 

Bonneville Power Administration 
PJM Interconnection 
Tennessee Valley Authority 
ISO New England Inc. 


Steel Manufacturers Association 

American Gas Association 

Demand Response Coordinating Committee 

Council of Energy Resource Tribes 

National Association of State Energy Officials 

National Association of Energy Service Companies 

National Association of Regulatory Utility 
Commissioners 

National Rural Electric Cooperative Association 

Gas Appliance Manufacturers Association 

North American Insulation Manufacturers Association 

National Council on Electricity Policy 

Electric Power Research Institute 

American Public Power Association 

Edison Electric Institute 

National Association of State Energy Officials 

Edison Electric Institute 

Energy Programs Consortium 


To create a sustainable, aggressive national commitment to energy efficiency 


1-17 



References 


American Council for an Energy-Efficient Economy 
[ACEEE] (2004). A Federal System Benefits Fund: 
Assisting States to Establish Energy Efficiency and 
Other System Benefit Programs. Washington, DC. 

Callahan, K. Alliance to Save Energy (2006, January 
17 ). Energy Efficiency As a Cornerstone of National 
Energy Policy Presented to United States Energy 
Association, Washington, DC. 

Connecticut Energy Conservation Management Board 
[CECMB] (2006, March) Energy Efficiency: Investing 
in Connecticut's Future: Report of The Energy 
Conservation Management Board Year 2005 
Programs and Operations. 

<h ttp://www. dpuc. sta te. ct. us/Electric, nsf/ca fda4284 
95eb61485256e97005e054b/5abe828f8be753568 
525713900520270/$ FILE/FIN A L%20ECMB%20200 
5%20 Report. pdf> 

Eckman, T. (2005, September 26). The Northwest 
Forecast: Energy Efficiency Dominates Resource 
Development. Paper presented at the ACEEE 
Energy Efficiency As a Resource Conference. 
<http://www.nwcouncil. org/energy/present/default. htm> 

Innovest Strategic Value Advisors [Innovest] (2002, 
October). Energy Management & Investor Returns: 
The Real Estate Sector. 

Long Island Power Authority [LIPA] (2006). Clean Energy 
Initiative Annual Report 2005. 

Nadel, S., Shipley, A., and Elliott, R.N. (2004). The 
Technical, Economic and Achievable Potential for 
Energy Efficiency in the U.S.—A Meta-Analysis of 
Recent Studies. Washington, DC: American Council 
for an Energy-Efficient Economy [ACEEE], 

New York State Energy Research and Development 
Authority [NYSERDA] (2006, May) New York Energy 
$mart SM Program Evaluation and Status Report. 
Report to the System Benefits Charge Advisory 
Group, Draft Report. 

New York State Energy Research and Development 
Authority [NYSERDA] (2004, May). New York 
Energy $mart SM Program Evaluation and Status 
Report, Report to the System Benefits Charge 
Advisory Group, Final Report. Albany. 


Northeast Energy Efficiency Partnerships [NEEP] (2005, 
May). Economically Achievable Energy Efficiency 
Potential in New England. Optimal Energy. 

Northwest Power and Conservation Council [NWPCC] 
(2005, May). The 5^ Northwest Electric Power and 
Conservation Plan, <http://www.nwcouncil.org/ 
energy/ powerplan/default.htm> 

Puget Sound Energy (2005, April). Least Cost Plan. 

<h ttp://www. pse. com/energyEnvironmen t/ 
electricSupplyResPlanning.aspx> 

Sedano R., Murray, C. f and Steinhurst, W. R. (2005, 
May). Electric Energy Efficiency and Renewable 
Energy in New England: An Assessment of Existing 
Policies and Prospects for the Future. Montpelier, 
VT: The Regulatory Assistance Project. 

Southern California Edison (2006, January 6) Advice 
Letter (1955-e) to the California Energy 
Commission. 

Southwest Energy Efficiency Project [SWEEP] (2002, 
November). The New Mother Lode: The Potential 
for More Efficient Electricity Use in the Southwest. 
Report for the Hewlett Foundation Energy Series. 

U.S. Energy Information Administration [EIA] (2006). 
Annual Energy Outlook 2006. Washington, DC). 

U.S. Energy Information Administration [EIA] (2005, 
January). Annual Energy Outlook 2005. 
Washington, DC), <http://www.eia.doe.gov/oiaf/ 
archive/aeo05/index.html> 

U.S. Environmental Protection Agency [EPA] (2006). 
Clean Energy-Environment Guide to Action: 

Policies, Best Practices, and Action Steps for States. 
Washington, DC. 

Western Governors' Association [WGA] (2006, June). 
Clean Energy, a Strong Economy and a Healthy 
Environment. A Report of the Clean and Diversified 
Energy Advisory Committee. 

York, D. and Kushler, M. (2005, October). ACEEE's 3rd 
National Scorecard on Utility and Public Benefits 
Energy Efficiency Programs: A National Review and 
Update of State Level Activity. 
h ttp://www. aceee. org/pubs/u054.pdf 




1-18 National Action Plan for Energy Efficiency 










Utility Ratemaking 
& Revenue Requirements 



While some utilities manage aggressive energy efficiency programs as a strategy to diversify their portfolio, 
lower costs, and meet customer demand, many still face important financial disincentives to implementing 
such programs. Regulators working with utilities and other stakeholders, as well as boards working with 
publicly owned utilities, can establish or reinforce several policies to help address these disincentives, includ¬ 
ing overcoming the throughput incentive, ensuring program cost recovery, and defining shareholder 
performance incentives. 


Overview 

The practice of utility regulation is, in part, a choice 
about how utilities make money and manage risk. These 
regulatory choices can guide utilities toward or away 
from investing in energy efficiency, demand response, 
and distributed generation (DG). Traditional ratemaking 
approaches have strongly linked a utility's financial 
health to the volume of electricity or gas sold via the 
ratemaking structure, creating a disincentive to invest¬ 
ment in cost-effective demand-side resources that 
reduce sales. The ratemaking structure and process 
establishes the rates that generate the revenues that gas 
and electric utilities, both public and private, can recover 
based on the just and reasonable costs they incur to 
operate the system and to procure and deliver energy 
resources to serve their customers. 

Alternate financial incentive structures can be designed 
to encourage utilities to actively promote implementa¬ 
tion of energy efficiency when it is cost effective to do 
so. Aligning utility and public interest aims by discon¬ 
necting profits and fixed cost recovery from sales vol¬ 
umes, ensuring program cost recovery, and rewarding 
shareholders can "level the playing field" to allow for a 
fair, economically based comparison between supply- 
and demand-side resource alternatives and can yield a 
lower cost, cleaner, and reliable energy system. 


This chapter explores the utility regulatory approaches 
that limit greater deployment of energy efficiency as a 
resource in U.S. electricity and natural gas systems. 
Generally, it is within the power of utility commissions 
and utilities to remove these barriers. 1 Eliminating the 
throughput incentive is one way to remove a disincentive 
to invest in efficiency. Offering shareholder incentives 
will further encourage utility investment. Other disincen- 


Leadership Group Recommendations 
Applicable to Utility Ratemaking and 
Revenue Requirements 


• Modify policies to align utility incentives with the deliv¬ 
ery of cost-effective energy efficiency and modify 
ratemaking practices to promote energy efficiency 
investments. 

• Make a strong, long-term commitment to implement 
cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities 
for energy efficiency. 

• Provide sufficient, timely, and stable program funding 
to deliver energy efficiency where cost-effective. 

A more detailed list of options specific to the objective of 
promoting energy efficiency in ratemaking and revenue 
requirements is provided at the end of this chapter. 


1 In some cases, state law limits the latitude of a commission to grant ratemaking or earnings flexibility. Removing barriers to energy efficiency in these 
states faces the added challenge of amending statutes. 

To create a sustainable, aggressive national commitment to energy efficiency 2-1 















tives for energy efficiency include a short-term resource 
acquisition horizon and wholesale market rules that do 
not capture the system value of energy efficiency. After 
an introduction to these barriers and solutions, this 
chapter will report on successful efforts in states to 
implement these solutions. The chapter closes with a set 
of recommendations for pursuing the removal of these 
barriers. 

This chapter refers to utilities as integrated energy com¬ 
panies selling electricity as well as delivering it. Many of 
these concepts, however, also apply to states that 
removed retail electricity sales responsibilities from utili¬ 
ties—turning the utility into an electric transmission and 
distribution company without a retail sales function. 

Barriers and Solutions to Effective 
Energy Efficiency Deployment 

Common disincentives for utilities to invest more in cost- 
effective energy efficiency programs include the 
"throughput incentive," the lack of a mechanism for 
utilities to recover the costs of and provide funding for 
energy efficiency programs, and a lack of shareholder 
and other performance incentives to compete with those 
for investments in new generation. 

Traditional Regulation Motivates Utilities to 
Sell More: The Throughput Incentive 

Rates change with each major "rate case," the tradition¬ 
al and dominant form of state-level utility ratemaking. 2 
Between rate cases, utilities have a financial incentive to 
increase retail sales of electricity (relative to forecast or 
historic levels, which set "base" rates) and to maximize 
the "throughput" of electricity across their wires. This 
incentive exists because there is often a significant incre¬ 
mental profit margin on incremental sales. When rates 


are reset, the throughput incentive resumes with the 
new base. In jurisdictions where prices are capped for an 
extended time, the utility might be particularly anxious 
to grow sales to add revenue to cover cost increases that 
might occur during the freeze. 

With traditional ratemaking, there are few mechanisms 
to prevent "over-recovery" of costs, which occurs if sales 
are higher than projected, and no way to prevent 
"under-recovery," which can happen if forecast sales are 
too optimistic (such as when weather or regional eco¬ 
nomic conditions deviate from forecasted or "normal" 
conditions). 3 

This dynamic creates an automatic disincentive for utili¬ 
ties to promote energy efficiency, because those actions 
will reduce the utility's net income—even if energy effi¬ 
ciency is clearly established and agreed-upon as a less 
expensive means to meet customer needs as a least-cost 
resource and is valuable to the utility for risk manage¬ 
ment, congestion reduction, and other reasons (EPA, 
2006). The effect of this disincentive is exacerbated in 
the case of distribution-only utilities, because the rev¬ 
enue impact of electricity sales reduction is dispropor¬ 
tionately larger for utilities without generation resources. 
While some states have ordered utilities to implement 
energy efficiency, others have questioned the practicality 
of asking a utility to implement cost-effective energy 
efficiency when their financial self-interest is to have 
greater sales. 

Several options exist to help remove this financial barrier 
to greater investment in energy efficiency: 

Decouple Sales from Profits and Fixed Cost Recovery 

Utilities can be regulated or managed in a manner that 
allows them to receive their revenue requirement with less 
linkage to sales volume. The point is to regulate utilities such 
that reductions in sales from consumer-funded energy 


2 Public power utilities and cooperative utilities have their own processes to adjust rates that do not require state involvement. 

3 Over-recovery means that more money is collected from consumers in rates than is needed to pay for allowed costs, including return on investment. This 
happens because average rates tend to collect more for sales in excess of projected demand than the marginal cost to produce and deliver the electric¬ 
ity for those increased sales. Likewise, under-recovery happens if sales are less than the amount used to set rates (Moskovitz, 2000). 


2-2 National Action Plan for Energy Efficiency 



Utility and industry Structure and Energy Efficiency 


Publicly and Cooperatively Owned Utilities 
Compared With Investor-Owned Utilities 
The throughput incentive affects municipal and coop¬ 
erative utilities in a distinctive way. Public power and 
co-ops and their lenders are concerned with ensuring 
that income covers debt costs, while they are not con¬ 
cerned about "profits." Available low-cost financing 
for co-ops sometimes comes with restrictions that 
limit its use to power lines and generation, further 
diminishing interest in energy efficiency investments. 

Natural Gas vs. Electric Utilities 
Natural gas and electric utilities both experience the 
throughput incentive under traditional ratemaking. 
Natural gas utilities operate in a more competitive 
environment than do electric utilities because of the 
non-regulated alternative fuels, but this situation can 
cut either way for energy efficiency. For some gas util¬ 
ities, energy efficiency is an important customer serv¬ 
ice tool, while in other cases, it is just seen as an 
imposed cost that competitors do not have. Natural 
gas companies in the United States also generally see 
a decline in sales due to state-of-the-art efficiencies in 
gas end uses, a phenomenon not seen by electric 
companies. Yet cost-effective efficiency opportunities 
for local gas distribution companies remain available. 


efficiency, building codes, appliance standards, and distrib¬ 
uted generation are welcomed, and not discouraged. 

For example, if utility revenues were connected to the 
number of customers, instead of sales, the utility would 
experience different incentives and might behave quite dif¬ 
ferently. Under this approach, at the conclusion of a con¬ 
ventional revenue requirement proceeding, a utility's rev¬ 
enues per customer could be fixed. An automatic adjust¬ 
ment to the revenue requirement would occur to account 
for new or departing customers (a more reliable driver of 


Restructured vs. Traditional Markets 
The transition to retail electric competition threw open 
for reconsideration all assumptions about utility struc¬ 
ture. The effects on energy efficiency have been 
strongly positive and negative. The throughput incen¬ 
tive is stronger for distribution-only companies with 
no generation and transmission rate base. Price caps, 
which typically are imposed in a transition to retail 
competition, diminish utility incentive to reduce sales 
because added revenue helps cope with new costs. 
Price caps also discourage utilities from adding near- 
term costs that can produce a long-term benefit, such 
as energy efficiency. As a result, energy efficiency is 
often disconnected from utility planning. On the other 
hand, several states have provided stable funding for 
energy efficiency as part of the restructuring process. 

High-Cost vs. Low-Cost States 
Energy efficiency has been more popular in high-cost 
states. Low-cost states tend to see energy efficiency as 
more expensive than their supplies from hydroelectric 
and coal sources, though there are exceptions where 
efficiency is seen as a low-cost incremental resource 
and a way to meet environmental goals. Looking for¬ 
ward, all states face similar, higher cost options for 
new generation, suggesting that the current resource 
mix will be less important than future resource options 
in considering the value of new energy efficiency 
investments. 

costs than sales). An alternative to the revenue per cus¬ 
tomer approach is to use a simple escalation formula to 
forecast the fixed cost revenue requirement over time. 

Under this type of rate structure, a utility that is more effi¬ 
cient and reduces its costs over time through energy effi¬ 
ciency will be able to increase profits. Furthermore, if sales 
are reduced by any means (e.g., efficiency, weather, or eco¬ 
nomic swings) revenues and profits will not be affected. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-3 








This approach eliminates the throughput disincentive and 
does not require a commission resolution of the amount 
of lost revenues associated with energy efficiency (see 
Table 2-1). A critical element of revenue decoupling is a 
true-up of actual results to forecasted results. Rates 
would vary up or down reflecting a balancing account for 
total authorized revenue requirements and actual rev¬ 
enues from electricity or gas consumed by customers. The 
true-up is fundamental to accomplish decoupling profits 
and fixed cost revenues from sales volumes. Annual 
adjustments have been typical and can be modeled in the 
Energy Efficiency Benefits Calculator (see Chapter 4: 
Business Case for Energy Efficiency), but a quarterly or 
monthly adjustment might be preferred. The plan may 
also include a deadband, meaning that modest devia¬ 
tions from the forecast would produce no change in 
rates, while larger deviations will result in a rate change. 
The plan might also share some of the deviations 
between customers and the utility. The magnitude of rate 
changes at any one time can be capped if the utility and 
regulators agree to defer the balance of exceptional 
changes to be resolved later. Prudence reviews should be 
unaffected by a decoupling plan. A decoupling plan 
would typically last a few years and could be changed to 
reflect new circumstances and lessons learned. 
Decoupling has the potential to lower the risk of the util¬ 
ity, and this feature should lead to consumer benefits 
through an overall lower cost of capital to the utility. 4 

Decoupling through a revenue per customer cap is 
presently more prevalent in natural gas companies, but 
can be a sound tool for electric companies also. Rate 
design need not be affected by decoupling (see Chapter 
5: Rate Design for rate design initiatives that promote 
energy efficiency), and a shift of revenues from the vari¬ 
able portion of rates to the fixed portion does not 
address the throughput incentive. The initial revenue 
requirement would be determined in a routine rate case, 
the revenue per customer calculation would flow from 


the same billing determinants used to set rates. Service 
performance measures can be added to assure that cost 
reductions result from efficiency rather than service 
reductions. Some state laws limit the use of balancing 
accounts and true-ups, so legislative action would be 
necessary to enable decoupling in those states. 

A decoupling system can be simple or complex, depend¬ 
ing on the needs of regulators, the utility, or other par¬ 
ties and the value of a broad stakeholder process leading 
up to a decoupling system (Kantor, 2006). As the text 
box addressing lessons learned suggests, it is important 
to establish the priorities that the system is being creat¬ 
ed to address so it can be as simple as possible while 
avoiding unintended consequences. Additionally, it is 
important to evaluate any decoupling system to ensure 
it is performing as expected. 5 

Shifting More Utility Fixed Costs Into Fixed Customer 
Charges 

Traditionally, rates recover a portion of the utility's fixed 
costs through volumetric rates, which helps service 
remain affordable. To better assure recovery of capital 
asset costs with reduced dependence on sales, state util¬ 
ity commissions could reduce variable rates and increase 
the fixed rate component, often referred to as the fixed 
charge or customer charge. This option might be partic¬ 
ularly relevant in retail competition states because wires- 
only electric utilities have relatively high proportions of 
fixed costs. This shift is attractive to some natural gas 
systems experiencing sales volume attrition due to 
improved furnace efficiency and other trends. This shift 
reduces the throughput incentive for distribution compa¬ 
nies and is an alternative to decoupling. There are some 
limiting concerns, including the effect a reduction in the 
variable charge might have on consumption and con¬ 
sumers’ motivation to practice energy efficiency, and the 
potential for high using consumers to benefit from the 
change while low-using customers pay more. 


4 The lowering of a gas utility's cost of capital because of the reduced risk introduced by a revenue decoupling mechanism was recently affirmed by Barone 
(2006). 

5 Two recent papers discuss decoupling in some detail: Costello, 2006 and NERA, 2006. 


2-4 National Action Plan for Energy Efficiency 



The First Wave of Decoupling and Lessons Learned 


In the early 1990s, several state commissions and util- 
ities responded to the throughput incentive by creat¬ 
ing decoupling systems. In all cases, decoupling was 
discontinued by the end of the decade. The reasons 
for discontinuation provide guidance to those consid¬ 
ering decoupling today and indicate that the initial 
idea was good, but that the execution left important 
issues unaddressed. 

In the case of California, decoupling was functioning 
well, using forecasted revenues and true-ups to actu¬ 
als, but the move to retail competition precipitated its 
end in 1996 (CPUC, 1996). Following the energy cri¬ 
sis of 2000-2001, California recognized the impor¬ 
tance of long-term energy efficiency investments and 
reinstated mechanisms to eliminate the throughput 
incentive. 

Puget Sound Energy in Washington adopted a decou¬ 
pling plan in 1990. There were several problems. The 
split between variable power costs (recovered via a 
true-up based on actual experience) and fixed costs 
(recovered based on a revenue-per-customer calcula¬ 
tion) was wrong. While customer numbers (and 
revenue) were increasing, new investments in trans¬ 
mission were not needed so the fixed cost part of the 
plan over-recovered. Meanwhile, new generation 
from independent generators was too expensive, and 
this added power cost (minus a prudence disal¬ 
lowance, which further complicated the scene) was 
passed to ratepayers. Unlike the current California 
decoupling method, there was no reasonable forecast 
over time for power costs. Risk of power cost increas¬ 
es was insufficiently shared. The results were a big rate 
increase and anger among customers. In retrospect, 
risk allocation and the split of fixed and variable costs 
were incompatible to the events that followed and 
offer a useful lesson to future attempts. The true-up 


process and the weather normalization process 
worked well. The power costs that ignited the contro¬ 
versy over the decoupling plan would have been 
recoverable in rates under the traditional system. A 
recent effort to restore decoupling with Puget 
foundered over a dispute about whether the allowed 
return on equity during a prior rate case should be 
changed if decoupling was reinstated (Jim Lazar, per¬ 
sonal communication, October 21, 2005). 

Central Maine Power also adopted a decoupling plan 
at the beginning of the 1990s. The plan was ill- 
equipped, however, to account for an ensuing steep 
economic downturn that reduced sales by several per¬ 
centage points. Unfortunately, this effect far out¬ 
weighed any benefits from energy efficiency. The 
true-ups called for in the plan were onerous due to 
the dip in sales, and authorities decided to delay them 
in hopes that the economy would turn around. When 
that did not happen, the rate change was quite large 
and was attributed to the decoupling plan, even 
though most of the rate increase was due to reduced 
sales and would have occurred anyway. A lesson from 
this experience is to not let the period between true- 
ups go on too long and to consider more carefully 
what happens if market prices, the economy, the 
weather, or other significant drivers are well outside 
expected ranges. 

In both the Puget and Central Maine cases, responsibil¬ 
ity for large rate increases was misassigned to the 
decoupling plan, when high power costs from inde¬ 
pendent power producers (Puget) or general economic 
conditions (Central Maine) were primarily responsible. 
That said, serious but correctable flaws in the decou¬ 
pling plans left consumers exposed to more risk than 
was necessary. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-5 






Provide Utilities the Profit Lost Through Efficiency 

Another way to address the throughput incentive is to 
calculate the profits foregone to successful energy effi¬ 
ciency. Lost Revenue Adjustment Mechanisms (LRAM) 
allow a utility to directly recoup the "lost" profits and 
contributions to fixed costs associated with not selling 
additional units of energy because of the success of 
energy efficiency programs in reducing electricity con¬ 
sumption. The amount of lost profit can be estimated by 
multiplying the fixed portion of the utility's prices by the 


energy savings from energy efficiency programs or the 
energy generated from DG, based on projected savings 
or ex post impact evaluation studies. The amount of lost 
estimated profits is then directly returned to the utility's 
shareholders. Some states have adopted these mecha¬ 
nisms either through rate cases or add-ons to the fuel 
adjustment clause calculations. 

Experience has shown that LRAM can allow utilities to 
recover more profits than the energy efficiency program 


Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons 


Policy 

Pros 

Cons 

Traditional cost of service 
plus return regulation 

• Familiar system for regulators and utilities. 

• Rate changes follow rate cases (except for fuel/purchased 
gas adjustment clause states). 

• Reduced sales reduce net income and contributions to 
fixed costs. 

• Sales forecasts can be contentious. 

• Harder to connect good utility performance to a financial 
consequence. Risks outside control of utility might be 
assigned to the utility. 

Decoupling (use of a forecast 
of revenue or revenue per 
customer, with true-ups to 
actual results during a 
defined timeframe) 

• Removes sales incentive and distributed resource disincen¬ 
tives. 

• Authorized fixed costs covered by revenue. 

• All beneficial actions and policies that reduce sales (distrib¬ 
uted generation, energy efficiency programs, codes and 
standards, voluntary actions by customers, demand 
response) can be promoted by the utility without adversely 
affecting net income or coverage of fixed costs. 

Opportunity to easily reward or penalize utilities based on 
performance. 

• True-ups from balancing accounts or revenue per customer 
are simple. 

• Easy to add productivity factors, inflation adjustments, and 
performance indicators with rewards and penalties that 
can be folded into the true-up process. 

• Reduces volatility of utility revenue resulting from many 
causes. Risks from abnormal weather, economic perform¬ 
ance, or energy markets can be allocated explicitly 
between customers and the utility. 

• Lack of experience. Viewed by some as a more complex 
process. 

• Quality of forecasts is very important. 

• Some consumer advocates are uncomfortable with rate 
adjustments outside rate case or familiar fuel adjustment 
clause. 

• Frequent rate adjustments from true-ups are objectionable 
to those favoring rate stability who worry about accounta¬ 
bility for rate increases. 

• Process of risk allocation can cause decoupling plan to 
break down. Connection between reconstituted risks and 
cost of capital can cause impasse. 

• Many issues to factor into the decoupling agreement. Past 
experience with decoupling indicates that it can be hard to 
"get it right," though these experiences suggest solutions. 

Lost revenue adjustment 

• Restores revenue to utility that would have gone to earn¬ 
ings and coverage of fixed costs but is lost by energy effi¬ 
ciency. 

• Diminishes the throughput disincentive for specific qualify¬ 
ing programs. 

• Any sales reductions from efficiency initiatives outside qual¬ 
ifying programs are not addressed, leaving the throughput 
incentive in place. 

• Historically contentious, complex process to decide on lost 
revenue adjustment. Potentially rewards under-performing 
energy efficiency programs. 

independent energy efficiency 
administration 

• Administration of energy efficiency is assigned to an entity 
without the conflict of the throughput incentive. 

• Utility can still promote load building. Programs that would 
reduce sales outside the activities of the independent 
administrator might still be discouraged due to the 
throughput incentive. 


2-6 National Action Plan for Energy Efficiency 











actually saved because the lost profit is based on project¬ 
ed, rather than actual, energy savings. Resolving LRAM 
in rate cases has been contentious in some states. 
Furthermore, because utilities still earn increased profits 
on additional sales, this approach still discourages utili¬ 
ties from implementing additional energy efficiency or 
supporting independent energy efficiency activities. A 
comparison of decoupling and the LRAM approach is 
provided in Table 2-1. 

A variation is to roughly estimate the amount of lost prof¬ 
its and make a specified portion (50 to 100 percent) avail¬ 
able to the utility to collect based on its performance at 
achieving certain program goals. This approach is simpler 
and more constructive than a commission docket to cal¬ 
culate lost revenue. It provides a visible way for the utili¬ 
ty to earn back lost profits with program performance 
and achievements consistent with the public interest. This 
system translates well into employee merit pay systems, 
and the goals can fit nicely into management objectives 
reported to shareholders, a utility's board of directors, or 
Governors. Public interest groups appreciate the connec¬ 
tion to performance. 

Non-Utility Administration 

Several states, such as Oregon, Vermont and New York, 
have elected to relieve utilities from the task of manag¬ 
ing energy efficiency programs. In some cases, state gov¬ 
ernment has taken on this responsibility, and in others, a 
third party was created or hired for this purpose. The 
utility still has the throughput incentive, so while effi¬ 
ciency administration might be without conflict, the util¬ 
ity may still engage in load-building efforts contrary to 
the messages from the efficiency programs. Addressing 
the throughput incentive remains desirable even where 
non-utility administration is in place. Non-utility energy 
efficiency administration can apply to either electricity or 
natural gas. Where non-utility energy efficiency adminis¬ 
tration is in place, cooperation with the utility remains 
important to ensure that the customer receives good 
service (Harrington, 2003). 


Wholesale Power Markets and the Throughput 
Incentive 

In recent years, wholesale electric power prices have 
increased, driven by increases in commodity fuel costs. In 
many parts of the country, these increases have created 
a situation in which utilities with generation or firm 
power contracts that cost less than clearing prices might 
make a profit if they can sell excess energy into the 
wholesale market. Some have questioned whether or 
not the situation of utilities seeing wholesale profits from 
reduced retail sales diminishes or removes the through¬ 
put incentive. 

Empirically, these conditions do not appear to have 
moved utilities to accelerate energy efficiency program 
deployment. In states in which generation is divested 
from the local utility, the companies serving retail cus¬ 
tomers see no change to the throughput incentive. 
There is little to suggest how these market conditions 
will persist or change. In the absence of a more defini¬ 
tive course change, evidence suggests that the recent 
trend should not dissuade policymakers and market par¬ 
ticipants from addressing the throughput incentive. 

Recovering Costs / Providing Funding for 
Energy Efficiency Programs 

Removing the throughput incentive is a necessary step in 
addressing the barriers many utilities face to investing more 
in energy efficiency. It is unlikely to be sufficient by itself in 
promoting greater investment, however, because under 
traditional ratemaking, utilities might be unable to cover 
the costs of running energy efficiency programs. 6 To 
ensure funds are available for energy efficiency, policy¬ 
makers can utilize and establish the following mechanisms 
with cooperation from stakeholders: 

Revenue Requirement or Procurement Funding 

Policy-makers and regulators can set clear expectations 
that utilities should consider energy efficiency as a 
resource in their resource planning processes, and it 
should spend money to procure that resource as it would 


6 See Chapter 3: Energy Resource Planning Processes for discussion of utility resource planning budgets being used to fund energy efficiency. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-7 







for other resources. This spending would be part of the 
utility revenue requirement and would likely appear as 
part of the resource procurement spending for all 
resources needed to meet consumer demand in all 
hours. In retail competition states, the default service 
provider, the distribution company, or a third party can 
handle the responsibility of acquiring efficiency 
resources. 

Spending Budgets 

To reduce regulatory disputes and create an atmosphere 
of stability among utility managers, trade allies, and cus¬ 
tomers, the legislature or regulator can determine a 
budget level for energy efficiency spending—generally a 
percentage of utility revenue. This budget level would be 
set to achieve some amount of the potentially available, 
cost-effective, program opportunities. The spending 
budget allows administrator staff, trade allies, and con¬ 
sumers to count on a baseline level of effort and reduces 
the likelihood of spending disruptions that erode cus¬ 
tomer expectations and destroy hard-to-replace market 
infrastructure needed to deliver energy efficiency. 
Unfortunately, spending budgets are sometimes treated 
as a maximum spending level even if more cost-effective 
efficiency can be gained. Alternatively, a spending budg¬ 
et can be treated as a minimum if policymakers also 
declare efficiency to be a resource. In that event, addi¬ 
tional cost-effective investments would be recovered as 
part of the utility revenue requirement. 

Savings Target 

An alternative to minimum spending levels is a mini¬ 
mum energy savings target. This alternative could be 
policy-driven (designed for consistency to obtain a cer¬ 
tain percentage of existing sales or forecasted growth, 
or as an Energy Efficiency Portfolio Standard [EEPS]) or 
resource-driven (changing as system needs dictate). 
Efficiency budgets can be devised annually to achieve 
the targets. The use of savings targets does not address 
how money is collected from customers, or how pro¬ 
gram administration is organized. For more information 
on how investments are selected, see Chapter 3: Energy 
Resource Planning Processes. 


Clear, Reliable, and Timely Energy Efficiency Cost 
Recovery System 

Utilities value a clear and timely path to cost recovery, 
and a well-functioning regulatory process should provide 
that. Such a process contributes to a stable regulatory 
atmosphere that supports energy efficiency programs. 
Cost recovery can be linked to program performance (as 
discussed in the next section) so that utilities would be 
responsible for prudent spending of efficiency funds. 

The energy efficiency program cost recovery issue is elim¬ 
inated from the utility perspective if a non-utility admin¬ 
istrative structure is used; however, this approach does 
not eliminate the throughput incentive. Furthermore, 
funding still needs to be established for the non-utility 
administrator. 

Tariff Rider for Energy Efficiency 

A tariff rider for energy efficiency allows for a periodic 
rate adjustment to account for the difference between 
planned costs (included in rates) and actual costs. 

System Benefits Charge 

In implementing retail competition, several states added 
a separate charge to customer bills to collect funds for 
energy efficiency programs; several other states have 
adopted this idea as well. A system benefits charge (SBC) 
is designed to provide a stable stream of funds for 
public purposes, like energy efficiency. SBCs do have 
disadvantages. If the funds enter the purview of state 
government, they can be vulnerable to decisions to use 
the funds for general government purposes. Also, the 
charge appears to be an add-on to bills, which can irri¬ 
tate some consumers. This distinct funding stream can 
lead to a disconnection in resource planning between 
energy efficiency and other resources. Regulators and 
utilities might need to take steps to ensure a comprehen¬ 
sive planning process when dealing with this type of 
funding.? 


7 This device might also pool funds for other public benefit purposes, such as renewable energy system deployment and bill assistance for low-income 
consumers. 

2-8 National Action Plan for Energy Efficiency 



















Providing Incentives for Energy Efficiency 
Investment 

Some suggest that if energy efficiency is a cost-effective 
resource, utilities should invest in it for that reason, with no 
reason for added incentives. Others say that for effective 
results, incentives should be considered because utilities 
are not rewarded financially for energy efficiency resources 
as they are for supply-side resources. This section reviews 
options for utility incentives to promote energy efficiency. 

When utilities invest in hard assets, they depreciate these 
costs over the useful lives of the assets. Consumers pay 
a return on investment for the un-depreciated balance of 
costs not yet recovered, which spreads the rate effect of 
the asset over time. Utilities often do not have any 
opportunity to earn a return on energy efficiency spending, 
as they do with hard assets. This lack of opportunity for 
profit can introduce a bias against efficiency investment. 
Incentives for energy efficiency should be linked to 
achieving performance objectives to avoid unnecessary 
expenditures, and be evaluated by regulators based on 
their ability to produce cost-effective program perform¬ 
ance. Performance objectives can also form the basis of 
penalties for inferior program performance. Financial 
incentives for utilities should represent revenues above 
those that would normally be recovered in a revenue 
requirement from a rate case. 

Energy Efficiency Costs: Capitalize or Expense? 

In most jurisdictions, energy efficiency costs are 
expensed, which means all costs incurred for energy effi¬ 
ciency are placed into rates during the year of the 
expense. When a utility introduces an energy efficiency 
program, or makes a significant increase or decrease in 
energy efficiency spending, rates must change to collect 
all annual costs. An increase in rates might be opposed 
by consumer advocates and other stakeholders, especially 
if parties disagree on whether the energy efficiency 
programs are cost-effective. 


To moderate the rate effect of efficiency, regulators 
could capitalize efficiency costs, at least in part. 8 
Capitalizing helps the utility by allowing for cost recov¬ 
ery over time but can cost consumers more than expens¬ 
ing in the long run. Some efficiency programs can meet 
short term rate-oriented cost-effectiveness tests if costs 
are capitalized. However, if the choice is made to capital¬ 
ize, the regulator still has to decide the appropriate 
amortization period for program costs, balancing con¬ 
cern for immediate rate impacts and long term costs. 9 
Capitalizing energy efficiency investments may be limit¬ 
ed by the magnitude of "regulatory assets" that is 
appropriate for a utility. Bond ratings might decline if the 
utility asset account has too many assets that are not 
backed by physical capital. The limit on capitalized effi¬ 
ciency investment varies depending on the rest of the 
utility balance sheet. 

Some argue that capitalizing energy efficiency is too costly 
and that rate effects from expensing are modest. Others 
note that in some places, capitalizing energy efficiency is 
the only way to deal with transitional rate effects and can 
provide a match over time between the costs and benefits 
of the efficiency investments (Arthur Rosenfeld, personal 
communication, February 20, 2006). 

In some cases, it might be appropriate to consider 
encouraging unregulated utility affiliates to invest in and 
benefit from energy efficiency and other distributed 
resources. 

Bonus Return, Shared Savings 

To encourage energy efficiency investments over supply 
investments, regulators can authorize a return on invest¬ 
ment that is slightly higher (e.g., 5 percent) for energy 
efficiency investments or offer a bonus return on equity 
investment for superior performance. Another approach 
is to share a percentage of the energy savings value, per¬ 
haps 5 to 20 percent, with the utility. A shared savings 
system has the virtue of linking the magnitude of the 


8 Capitalizing energy efficiency also reinforces the idea of efficiency as a substitute to supply and transmission. 

9 Iowa and Vermont initially capitalized energy efficiency spending, but transitioned to expense in the late 1990s. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-9 










reward with the level of program performance. A varia¬ 
tion is to hold back some of the funds allocated to ener¬ 
gy efficiency for award to shareholders for achieving 
energy efficiency targets. Where this incentive is used, 
the holdback can run between 3 and 8 percent of the 
program budget. Some of these funds can be channeled 
to employees to reward their efforts (Arthur Rosenfeld, 
personal communication, February 20, 2006; Plunkett, 
2005). 

Bonus returns, shared savings, and other incentives can 
raise the total cost of energy efficiency. However, if the 
incentives are well-designed and effective, they will 
encourage the utility to become proficient at achieving 
energy efficiency savings. The utility might be motivated 
to provide greater savings for consumers through more 
cost-effective energy efficiency. 

Energy Efficiency Lowers Risk 

Energy efficiency can help the financial ratings of utilities 
if it reduces the risks associated with regulatory uncer¬ 
tainty, long-term investments in gas supply and transport 
and electric power and transmission, and the risks associ¬ 
ated with fossil fuel market prices that are subject to 
volatility and unpredicted price increases. By controlling 
usage and demand, utilities can also control the need for 
new infrastructure and exposure to commodity markets, 
providing risk management benefits. To the extent that a 
return on efficiency investments is likely and the chance 
of a disallowance of associated costs is minimized, 
investors will be satisfied. Decoupling tends to stabilize 
actual utility revenues, providing a better match to actual 
cost, which should further benefit utility bond ratings. 

Reversing a Short-Term Resource Acquisition 
Focus: Focus on Bills, Not Just Rates 

Policy-makers tend to focus on electric rates because 
they can be easily compared across states. They become 
a measure for business-friendliness, and companies con¬ 
sider rate levels in manufacturing siting and expansion 
decisions. But rates are not the only measure of service. 
A short-term focus on low rates can lead to costly missed 


investment opportunities and higher overall costs of 
electricity service over the long run. 

Over the long term, energy efficiency benefits can 
extend to all consumers. Eventually, reduced capital 
commitments and lower energy costs resulting from 
cost-effective energy efficiency programs benefit all 
consumers and lower overall costs to the economy, free¬ 
ing customer income for more productive purposes, like 
private investment, savings, and consumption. 
Improved rate stability and risk management from limit¬ 
ed sales growth tends to improve the reputation of the 
utility. Incentives and removing the throughput incen¬ 
tive make it easier for utilities to embrace stable or 
declining sales. 

A commitment to energy efficiency means accepting a 
new cost in rates over the short-term to gain greater sys¬ 
tem benefits and lower long-term costs, as is the case 
with other utility investments. State and local political 
support with a measure of public education might be 
needed to maintain stable programs in the face of per¬ 
sistent immediate pressure to lower rates. 

Related Issues With Wholesale Markets and 
Long-Term Planning 

Regulatory factors can hinder greater investment in cost- 
effective energy efficiency programs. These factors 
include the demand-side of the wholesale market not 
reacting to supply events like shortages or wholesale 
price spikes, and, for the electric sector, a short-term 
generation planning horizon, especially in retail compe¬ 
tition states. In addition, transmission system planning 
by regional transmission organizations (RTOs) and utili¬ 
ties tends to focus on wires and supply solutions, not 
demand resources like efficiency. The value of sustained 
usage reductions through energy efficiency, demand 
response and distributed generation is not generally con¬ 
sidered, nor compensated for in wholesale tariffs. These 
are regulatory choices and are discussed further in 
Chapter 3: Energy Resource Planning Processes. 10 


10 Planning and rate design implications are more thoroughly discussed in Chapters 3: Energy Resource Planning Processes and Chapter 5: Rate Design. 


2-10 National Action Plan for Energy Efficiency 








Energy Efficiency Makes Wholesale Energy Markets 
Work Better 

In the wholesale market venue, the value of energy effi¬ 
ciency would be revealed by a planning process that 
treats customer load as a manageable resource like sup¬ 
ply and transmission, with investment in demand-side 
solutions in a way that is equivalent to (not necessarily 
the same as) supply and transmission solutions. Demand 
response and efficiency can be called forth that specifi¬ 
cally reduces demand at peak times or in other strategic 
ways, or that reduces demand year-round. 

Declare Energy Efficiency a Resource 

To underscore the importance of energy efficiency, states 
can declare in statute or regulatory policy that energy 
efficiency is a resource and that utilities should factor 
energy efficiency into resource planning and acquisition. 
States concerned with risks on the supply side can also 
go one step further and designate that energy efficiency 
is the preferred resource. 

Link Energy and Environmental Regulation 

Environmental policy-makers have observed that energy 
efficiency is an effective and comparatively inexpensive 
way to meet tightening environmental limits to electric 
power generation, yet this attribute rarely factors into 
decisions by utility regulators about deployment of ener¬ 
gy efficiency. This issue is discussed further in Chapter 3: 
Energy Resource Planning Processes. 


State and Regional Examples of 
Successful Solutions to Energy 
Efficiency Deployment 

Numerous states have previously addressed or are cur¬ 
rently exploring energy efficiency electric and gas incen¬ 
tive mechanisms. Experiments in incentive regulation 
occurred through the mid-1990s but generally were 
overtaken by events leading to various forms of restruc¬ 
turing. States are expressing renewed interest in incen¬ 
tive regulation due to escalating energy costs and a 
recognition that barriers to energy efficiency still exist. 
Many state experiences are highlighted in the following 
text and Table 2-2. 

Addressing the Throughput Disincentive 
Direction Through Legislation 

New Mexico offers a bold statutory statement directing 
regulation to remove barriers to energy efficiency: "It 
serves the public interest to support public utility invest¬ 
ments in cost-effective energy efficiency and load man¬ 
agement by removing any regulatory disincentives that 
might exist and allowing recovery of costs for reasonable 
and prudently incurred expenses of energy efficiency 
and load management programs" (New Mexico Efficient 
Use of Energy Act of 2005). 

Decoupling Net Income From Sales 

California adopted decoupling for its investor-owned 
companies as it restored utility responsibility for acquir¬ 
ing all cost-effective resources. The state has also 
required these companies to pursue all cost-effective 
energy efficiency at or near the highest levels in the 
United States. A balancing account collects forecasted 
revenues, and rates are reset periodically to adjust for 
the difference between actual revenues and forecasts. 
Because some utility cost changes are factored into 
most decoupling systems, rate cases can become less 
frequent, because revenues and costs track more closely 
over time. 11 


11 See, for example, orders in California PUC docket A02-12-027. http://www.cpuc.ca.gov/proceedings/A0212027.htm. Oregon had used this method 
successfully for PacifiCorp, but when the utility was acquired by Scottish Power, the utility elected to return to the more familiar regulatory form. 

To create a sustainable, aggressive national commitment to energy efficiency 


2-11 








Maryland and Oregon have decoupling mechanisms in 
place for natural gas. In Maryland, Baltimore Gas and 
Electric has operated with decoupling for more than 
seven years, and Washington Gas recently adopted 
decoupling, indicating that regulators view decoupling 
as a success. 12 In Oregon, Northwest Natural Gas has a 
similar decoupling mechanism in place. 13 

The inherently cooperative nature of decoupling is 
demonstrated by utilities and public interest advocates 
agreeing on a system that addresses public and private 
interests. In all these instances, no rate design shift was 
needed to implement decoupling—the change is invisible 


to customers. A new proposal for New Jersey Natural 
Gas would adopt a system similar to those in use in 
Oregon and Maryland. 

See Table 2-2 for additional examples of decoupling. 

Reducing Cost Recovery Through Volumetric Charges 

After New York moved to retail competition and sepa¬ 
rated energy commodity sales from the electricity deliv¬ 
ery utility, the distribution utilities' rates were modified to 
increase fixed cost recovery through per-customer 
charges, and to decrease the magnitude of variable, vol¬ 
umetric rates. Removing fixed generation costs, as these 


Table 2-2. Examples of Decoupling 


State 

Type of Utility 

Key Features 

Related Rate 
Design Shifts? 

Political/Administrative 

Factors 

California 

Investor-owned electric and gas 

Balancing account to collect 
forecasted revenue; annual 
true-up. 

No 

Driven by commission, outcome of 
energy crisis; consensus oriented. 

http://www.epa.gov/cleanrgy/pdf/keystone/PrusnekPresentation.pdf 
http://www.cpuc.ca.goV/Published/Final_decision/15019.htm 

Maryland 

Investor-owned gas only 

Revenue per customer cap; 
monthly true-up. 

No 

Revenue stability primary motive of 
utility; frequent true-ups. 

http://www.energetics.com/madri/pdfs/timmerman_101105.pdf 
http://www.bge.com/vcmfiles/BGE/Files/Rates%20and%20Tariffs/Gas%20Service%20Tariff/Brdr_3.doc 

Oregon 

Investor-owned gas only at pres¬ 
ent; investor-owned electric in the 
past 

Revenue per customers cap; 
annual true-up. 

No 

Revenue stability primary motive of 
utility; renewed in 2005. 

http://www.raponline.org/Pubs/General/OregonPaper.pdf 

http://www.advisorinsight.com/pub/indexes/600_mi/nwn_ir.htm 

http://www.nwnatural.com/CMS300/uploadedFiles/24190ai.pdf 

http://apps.puc.state.or.us/orders/2002ords/02-633.pdf 

New Jersey 

Investor-owned gas (proposed) 

Revenue per customer. 

No 

Explicit intent of utility to promote 
energy efficiency and stabilize fixed 
cost recovery. 

http://www2.njresources.com/news/trans/newsrpt.asp?Year=2005 (see 12/05/05) 

Vermont 

Investor-owned electric (proposed) 

Forecast revenue cap and 
costs; balancing account and 
true-ups. 

No 

Legislative change promoted utility 
proposal; small utility looking for 
stability. 

http://www.greenmountainpower.biz/atyourservice/2006ratefiling.shtml 


12 BG&E's "Monthly Rate Adjustment" tariff rider is downloadable at http://www.bge.com/portal/site/bge/menuitem.6b0b25553d65180159c031e0da 
6176a0/. 

13 The full agreement can be found in Appendix A of Order 02-634, available at http://apps.puc.state.or.us/orders/2002ords/02-634.pdf. See also Hansen 
and Braithwait (2005) for an independent assessment of the Northwest Natural Gas decoupling plan prepared for the commission. 


2-12 National Action Plan for Energy Efficiency 


































assets were divested, dampened the effects on con¬ 
sumers. In combination with tracking and deferral mech¬ 
anisms to protect the utility from unanticipated costs 
and savings, the utilities have little incentive to increase 
electric sales. 

Using a Lost Revenue Adjustment 

Minnesota provided Xcel Energy with lost revenue 
adjustments for energy efficiency through 1999, and 
then moved to a performance-based incentive. Iowa 
currently provides utilities with lost revenue adjustments 
for energy efficiency. Connecticut allows lost revenue 
recovery for all electric energy efficiency. Massachusetts 
allows lost revenue recovery for all gas energy efficiency, 
requiring the accumulated lost revenues to be recovered 
within three years to prevent large accumulated bal¬ 
ances. Oregon allows lost revenue recovery for utility 
efficiency programs. Lost revenue adjustments have 
been removed in many states because of their cost to 
consumers. New Jersey is in the midst of a transition to 
a state-run administrator and provides lost revenue for 
utility-run programs in the meantime. 

Non-Utility Administration 

Several states have taken over the administration of 
energy efficiency, including Wisconsin (Focus on 
Energy), Maine (Efficiency Maine), New Jersey, and 
Ohio. In other states, a third party has been set up to 
administer programs, including Vermont (Efficiency 
Vermont) and Oregon (Energy Trust of Oregon). The 
New York State Energy Research and Development 
Authority (NYSERDA), a public authority, fits into both 
categories. There is no retail competition in Vermont or 
Wisconsin; this change was based entirely on an expec¬ 
tation of effectiveness. Oregon combines natural gas 
and electric efficiency programs, but only for the larger 
companies in each sector. Statewide branding of energy 
efficiency programs is a dividend of non-utility adminis¬ 
tration. Connecticut introduced an aspect of non-utility 
administration by vesting its Energy Conservation 
Management Board, a state board including state offi¬ 
cials, utility managers, and others, with responsibility to 
approve energy efficiency plans and budgets. 


Recovering Costs / Providing Funding for 
Energy Efficiency Programs 

Revenue Requirement 

When energy efficiency programs first began, they were 
funded as part of a utility revenue requirement. In many 
states, like Iowa, this practice has continued uninterrupted. 
In California, retail competition interrupted this method of 
acquiring energy efficiency, but since 2003, California is 
again funding energy efficiency along with other resources 
through the revenue requirement, a practice known there 
as "procurement funding." California also funds energy 
efficiency through SBC funding. 

Capitalizing Energy Efficiency Costs 

Oregon allows capitalization of costs, and the small 
electrics do so. Washington, Vermont, and Iowa capital¬ 
ized energy efficiency costs when programs began in the 
1980s to moderate rate effects. Vermont, for example, 
amortized program costs over five years. In the late 
1990s, however, as program spending declined, these 
states ended the practice of capitalizing energy efficien¬ 
cy costs, electing to expense all costs. Currently, 
Vermont stakeholders are discussing how to further 
increase efficiency spending beyond the amount collected 
by the SBC, and they are reconsidering moderating new 
rate effects through capitalizing costs. 

Spending Budgets, Tariff Riders, 
and System Benefits Charges 

Several states have specified percentages of net utility 
revenue or a specific charge per energy unit to be spent for 
energy efficiency resources. Massachusetts, for example, 
specifies 2.5 mills per kilowatt-hour (kWh) (while spending 
for natural gas energy efficiency is determined case by 
case). In Minnesota, there is a separate percentage 
designated for electric (1.5 percent of gross operating 
revenues) and for natural gas (0.5 percent) utilities. 
Vermont adopted a statewide SBC for its vertically inte¬ 
grated electric sector, while its gas energy efficiency costs 
remain embedded in the utility revenue requirement. 
Strong statutory protections guard funds from government 
appropriation. Wisconsin requires a charge, but leaves the 
commission to determine the appropriate level for each 


To create a sustainable, aggressive national commitment to energy efficiency 


2-13 


utility. There is a history of SBC funds being used for gen¬ 
eral government within the state; 2005 legislation 
apparently intended to make funding more secure 
(Wisconsin Act 141 of 2005). 

The New York commission chose to establish an annual 
spending budget for its statewide effort (exclusive of the 
public authorities and utilities), increasing it to $150 mil¬ 
lion in 2001 and to $175 million in 2006. Washington 
tariffs include a rider that allows adjustment of rates to 
recover energy efficiency costs that diverge from 
amounts included in rates, with annual true-ups. 

Providing Incentives for Energy Efficiency 
Investment 

Performance Incentives 

In Connecticut, the two electric utilities managing energy 
efficiency programs are eligible for "performance 
management fees" tied to performance goals approved 
by the regulators, including lifetime energy savings, 
demand savings, and other measures. Incentives are 
available for a range of outcomes from 70 to 130 percent 
of pre-determined goals. In 2004, the two utilities 
collectively reached 130 percent of their energy savings 
goals and 124 percent of their demand savings goals. 
They received performance management fees totaling 
$5.27 million. The 2006 joint budget anticipates $2.9 
million in performance incentives. 

In 1999, the Minnesota Commission adopted perform¬ 
ance incentives for the electric and natural gas investor- 
owned utilities that began at 90 percent of performance 
targets and are awarded for up to 150 percent of target 
levels. Performance targets for Minnesota utilities spend¬ 
ing more than the minimum spending requirement are 
adjusted to the minimum spending level for purposes of 
calculating the performance incentive. 

Rhode Island and Massachusetts offer similarly struc¬ 
tured incentives. Rhode Island sets aside roughly 5 per¬ 
cent of the efficiency budget for performance incentives. 
This amount is less than the amount that would proba¬ 


bly be justified if a lost revenue adjustment were used. A 
collaborative group of stakeholders recommends per¬ 
formance indicators and levels to qualify for incentives. 
In Massachusetts, utilities achieving performance tar¬ 
gets earn 5 percent on money spent for efficiency (in 
addition to being able to expense efficiency costs). 

Efficiency Vermont operates under a contract with the 
Vermont Public Service Board. The original contract 
called for roughly 3 percent of the budget for efficiency 
programs to be held back and paid if Efficiency Vermont 
meets a variety of performance objectives. 

Shared Savings 

Before retail competition, California used a shared sav¬ 
ings approach, in which the utilities received revenue 
equal to a portion of the savings value produced by the 
energy efficiency programs. A similar mechanism might 
be reinstated in 2006 (Arthur Rosenfeld, personal 
communication, February 20, 2006). 

Bonus Rate of Return 

Nevada allows a bonus rate of return for demand-side 
management that is 5 percent higher than authorized 
rates of return for supply investments. Regulations specify 
programs that qualify and the process to account for 
qualifying investments (Nevada Regulation of Public 
Utilities Generally, 2004). 

Lower Risk of Disallowance Through Multi- 
Stakeholder Collaborative 

California, Rhode Island, and other states employ 
stakeholder collaboratives to resolve important program 
and administrative issues and to provide settlements to 
the regulator. 

See Table 2-3 for additional examples of incentives for 
energy efficiency investments. 


2-14 National Action Plan for Energy Efficiency 





Table 2-3. Examples of Incentives for Energy Efficiency Investments 


State 

Type of Utility 

Key Features 

Political/Administrative Factors 

California 

Investor-owned electric 

Shared savings 

Encouraged by energy commission and utilities. 

Incentive proportionate to value of savings; no cap. 

http://www.raponline.org/Conferences/Minnesota/Presentations/PrusnekCAEEMinnesota.pdf 

Connecticut 

Investor-owned electric 

Performance incentives 

Part of retail competition bargain; incentive limited to a 
percentage of program budget; simple to compare 
results to performance goals. 

http://www.state.ct.us/dpuc/ecmb/index.html 

Massachusetts, 
Rhode Island 

Investor-owned electric 

Performance incentives 

Part of retail competition bargain; incentive limited to a 
percentage of program budget; simple to compare 
results to performance goals. 

http://www.mass.gov/dte/electric/04-11 /819order.pdf (Docket 04-11) 

http://www.npuc.org/eventsactions/docket/3463_NEC-2004DSMSettle(9.12.03).pdf 

Minnesota 

Investor-owned electric and natural gas 

Performance incentives 

Utility-specific plan arising to resolve other regulatory 
issues; incentive awarded on a sliding scale of perform¬ 
ance compared with goals; decoupling not authorized 
by statute. 

http://www.raponline.org/Pubs/RatePayerFundedEE/RatePayerFundedMN.pdf 

Nevada 

Investor-owned electric 

Bonus rate of return on equity 

Process to establish bonus is statutory. 

See http://www.leg.state.nv.us/NAC/NAC-704.html#NAC704Sec9523 

Vermont 

Efficiency utility 

Performance incentives 

Incentive structure set by contract; result of bargain 
between commission and third-party efficiency 
provider. 

http://www.state.vt.us/psb/eeucontract.html 


Regulatory Drivers for Efficiency in Resource 
Planning and Energy Markets 

Declare Energy Efficiency a Resource 

In New Mexico, the legislature has declared a goal of 
"decreasing electricity demand by increasing energy effi¬ 
ciency and demand response, and meeting new genera¬ 
tion needs first with renewable and distributed generation 
resources, and second with clean fossil-fueled generation." 
(New Mexico Efficient Use of Energy Act of 2005) 

In California, the state has made it very clear that energy 
efficiency is the most important resource (California SB 
1037, 2005). After the crises of 2000 and 2001, state 
leaders used energy efficiency to dampen demand 
growth and market volatility. An Energy Action Plan, 
adopted in 2003 by the California Public Utilities 
Commission (CPUC), the California Energy Commission 
(CEC), and the power authority, developed a "loading 
order" for new electric resources; the Energy Action Plan 


has been revised but the energy efficiency preference 
remains firm. The intent of the loading order is to 
"decreas(e) electricity demand by increasing energy effi¬ 
ciency and demand response, and meeting new genera¬ 
tion needs first with renewable and distributed generation 
resources, and second with clean fossil-fueled generation" 
(CEC, 2005). As a result, utilities are acquiring energy 
efficiency in amounts well in excess of those that would be 
procured with the SBC alone. Further, the utilities are 
integrating efficiency into their resource plans and using 
efficiency to solve resource problems. 

Clarifying the primary regulatory status of efficiency 
makes it clear that sympathetic regulation and cost 
recovery policies are important. California has adopted 
decoupling of net income and sales for its investor- 
owned utilities to remove regulatory barriers to a full 
financial commitment to energy efficiency. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-15 































One device for implementing this policy is an energy effi¬ 
ciency supply curve. The CEC created such a curve based 
on an assessment of energy efficiency potential to provide 
guidance as it reintroduced energy efficiency procurement 
expectations for the utilities in 2003. Furthermore, the 
CPUC cooperated with the CEC to set energy savings 
targets for each of the California investor-owned utilities 
based on an assessment of cost-effectiveness potential. 

A different approach to declaring energy efficiency a 
resource is to establish a portfolio or performance stan¬ 
dard for energy efficiency. In 2005, Pennsylvania and 
Connecticut included energy efficiency in their resource 
portfolio standards. Requiring all retail sellers to acquire 
sufficient certificates of energy savings will allocate rev¬ 
enue to efficiency providers in an economically efficient 
way (Pennsylvania Alternative Energy Portfolio Standards 
Act of 2004; Connecticut Act Concerning Energy 
Independence of 2005). 

As an outcome of its electric restructuring law, Texas is 
using energy efficiency as a resource to reduce demand. 
Texas' spending for energy efficiency is intended to pro¬ 
duce savings to meet 10% of forecasted electric demand 
growth. Performance is exceeding this level. 

Consider Energy Efficiency As a System Reliability 
Solution 

In New England, Independent System Operator New 
England (ISO-NE) faced a reliability problem in southwest 
Connecticut. A transmission line to solve the problem 
was under development, but would not be ready in time. 
New central station generation could not be sited in this 
congested area. Because the marketplace was not provid¬ 
ing a solution, ISO-NE issued a Request for Proposal (RFP) 
for any resources that would address the reliability prob¬ 
lem and be committed for four years. One energy efficien¬ 
cy bid was selected—a commercial office building lighting 
project worth roughly 5 megawatts (MW). Conditions of 
the award were very strict about availability of the 
capacity savings. This project will help to demonstrate 
how energy efficiency does deliver capacity. While ISO-NE 
deemed the RFP an emergency step that it would not 
undertake routinely, this process demonstrates that energy 


efficiency can be important to meeting reliability goals and 
can be paid for through federal jurisdictional tariffs. 

Other states, including Indiana, Vermont, and 
Minnesota direct that energy efficiency be considered 
as an alternative when utilities are proposing a power 
line project (Indiana Resource Assessment, 1995; 
Vermont Section 248; Minnesota Certificate of need for 
large energy facility, 2005.) 

Key Findings 

This chapter reviews opportunities to make energy effi¬ 
ciency an attractive business prospect by modifying elec¬ 
tric and gas utility regulation, and by the way that 
utilities collect revenue and make a profit. Key findings 
of this chapter indicate: 

•There are real financial disincentives that hinder all util¬ 
ities in their pursuit of energy efficiency as a resource, 
even when it is cost-effective and would lead to a 
lower cost energy system. Regulation, which is a key 
source of these disincentives, can be modified to 
remove these barriers. 

• Many states have experience in addressing financial 
disincentives in the following areas: 

— Overcoming the throughput incentive. 

— Providing reliable means for utilities to recover energy 
efficiency costs. 

— Providing a return on investment for efficiency programs 
that is competitive with the return utilities earn on new 
generation. 

— Addressing the risk of program costs being disallowed 
and other risks. 

— Recognizing the full value of energy efficiency to the 
utility system. 


2-16 National Action Plan for Energy Efficiency 






Recommendations and Options 

The National Action Plan for Energy Efficiency Leadership 
Group offers the following recommendations as ways to 
overcome many of the barriers to energy efficiency in utili¬ 
ty ratemaking and revenue requirements, and provides a 
number of options for consideration by utilities, regulators, 
and stakeholders (as presented in the Executive Summary): 

Recommendation: Modify policies to align utility 
incentives with the delivery of cost-effective energy 
efficiency and modify ratemaking practices to promote 
energy efficiency investments. Successful energy 
efficiency programs would be promoted by aligning utility 
incentives in a manner that encourages the delivery of 
energy efficiency as part of a balanced portfolio of supply, 
demand, and transmission investments. Historically, reg¬ 
ulatory policies governing utilities have more commonly 
compensated utilities for building infrastructure (e.g., 
power plants, transmission lines, pipelines) and selling 
energy, while discouraging energy efficiency, even when 
the energy-saving measures might cost less. Within the 
existing regulatory processes, utilities, regulators, and 
stakeholders have a number of opportunities to create the 
incentives for energy efficiency investments by utilities and 
customers. A variety of mechanisms have already been 
used. For example, parties can decide to provide incentives 
for energy efficiency similar to utility incentives for new 
infrastructure investments, and provide rewards for 
prudent management of energy efficiency programs. 

Options to Consider: 

• Addressing the typical utility throughput incentive and 
removing other regulatory and management disincentives 
to energy efficiency. 

• Providing utility incentives for the successful manage¬ 
ment of energy efficiency programs. 

Recommendation: Make a strong, long-term commit¬ 
ment to implement cost-effective energy efficiency as 
a resource. Energy efficiency programs are most successful 
and provide the greatest benefits to stakeholders when 
appropriate policies are established and maintained over 


the long-term. Confidence in long-term stability of the pro¬ 
gram will help maintain energy efficiency as a dependable 
resource compared to supply-side resources, deferring or 
even avoiding the need for other infrastructure invest¬ 
ments, and maintain customer awareness and support. 

Options to Consider: 

• Establishing funding requirements for delivering long¬ 
term, cost-effective energy efficiency. 

• Designating which organization(s) is responsible for 
administering the energy efficiency programs. 

Recommendation: Broadly communicate the benefits 
of and opportunities for energy efficiency. 

Experience shows that energy efficiency programs help 
customers save money and contribute to lower cost ener¬ 
gy systems. But these benefits are not fully documented 
nor recognized by customers, utilities, regulators, or policy¬ 
makers. More effort is needed to establish the business 
case for energy efficiency for all decision-makers and to 
show how a well-designed approach to energy efficiency 
can benefit customers, utilities, and society by (1) reducing 
customers' bills over time, (2) fostering financially healthy 
utilities (e.g., return on equity, earnings per share, and debt 
coverage ratios unaffected), and (3) contributing to posi¬ 
tive societal net benefits overall. Effort is also necessary to 
educate key stakeholders that although energy efficiency 
can be an important low-cost resource to integrate into the 
energy mix, it does require funding, just as a new power 
plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the busi¬ 
ness case for energy efficiency at the state, utility, other 
appropriate level addressing customer, utility, and 
societal perspectives. 

• Communicating the role of energy efficiency in lowering 
customer energy bills, and system costs and risks 
over time. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-17 



Recommendation: Provide sufficient, timely, and stable 
program funding to deliver energy efficiency where 
cost-effective. Energy efficiency programs require consis¬ 
tent and long-term funding to effectively compete with 
energy supply options. Efforts are necessary to establish 
this consistent long-term funding. A variety of mecha¬ 
nisms have been, and can be used, based on state, utility, 
and other stakeholder interests. It is important to ensure 
that the efficiency program providers have sufficient 
long-term funding to recover program costs, and imple¬ 
ment the energy efficiency measures that have been 
demonstrated to be available and cost-effective. A number 
of states are now linking program funding to the 
achievement of energy savings. 


Options to Consider: 

• Deciding on, and committing to, a consistent way for 
program administrators to recover energy efficiency 
costs in a timely manner. 

•Establishing funding mechanisms for energy efficiency 
from among the available options, such as revenue 
requirement or resource procurement funding, SBCs, 
rate-basing, shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 


2-18 National Action Plan for Energy Efficiency 


References 

Barone, R.J. (2006, May 23). Presentation to the 
Rethinking Natural Gas Utility Rate Design 
Conference, Columbus, Ohio. 

California Energy Commission [CEC], (2005, July). 
Implementing California's Loading Order for 
Electricity Resources. 

California Public Utility Commission [CPUC]. 

(1996, December 20). Opinion on Cost Recovery 
Plans, CPUC D.96-12-077. 

California SB 1037, California Statutes of 2005. 

Chapter 366. (2005) 

<http://info.sen.ca.gov/pub/bill/sen/sb_1001 - 
1050/sb_1037_bill_20050929_chaptered.html>. 
Connecticut, An Act Concerning Energy Independence, 
Public Act No. 05-1 (House Bill No. 7501) (2005). 
<http://www.cga.ct.gov/asp/cgabillstatus/cgabillsta- 
tus.asp?selBillType=Bill&bill_num=7501&which_year 
=2005>. 

Costello, K. (2006, April). Revenue Decoupling for 
Natural Gas Utilities. National Regulatory Research 
Institute, <http://www.nrri.ohio- 
state.edu/NaturalGas/revenue-decoupling-for-natu- 
ral-gas-utilities/>. 

Hansen, D.G. and Braithwait, S.D. (2005, March 31). 

A Review of Distribution Margin Normalization as 
Approved by the Oregon Public Utility Commission 
for Northwest Natural. Madison, Wisconsin: 
Christensen Associates Consulting. 

Harrington, C. (2003, May). Who Should Deliver 
Ratepayer Funded Energy Efficiency ? Regulatory 
Assistance Project, <http://www.raponline.org/ 
showpdf.asp?PDF_URL="Pubs/RatePayerFundedEE/ 
RatePayerFundedEEPartl.pdf">. 

Indiana Resource Assessment, Indiana Administrative 
Code [IAC], 170 IAC 4-7-6, Resource assessment. 
(1995) <http://www.in.gov/legislative/iac/ 

T01700/A00040.PDF>. 

Kantor, G. (2006, June 20). Presentation to the 2006 
Western Conference of Public Service 
Commissioners, Jackson, Wyoming. 


Minnesota, Certificate of need for large energy facility, 
Minnesota Statutes. Chapter 216B.243(3) (2005). 
<http://www. revisor, leg .state, m n. us/stats/ 
216B/243.html>. 

Moskovitz, D. (2000). Profits and Progress Through 
Distributed Resource. Regulatory Assistance Project. 
<http://www.raponline.org/showpdf.asp?PDF_URL= 
Pubs/General/Prof itsandProgressdr.pdfx 

Nevada, Regulation of Public Utilities Generally. Nevada 
Administrative Code 704.9523: Costs of imple¬ 
menting programs for conservation and demand 
management: Accounting; recovery. (2004) 
<http://www.leg.state.nv.us/NAC/NAC- 
704.html#NAC704Sec9523>. 

NERA Economic Consulting. (2006, April 20). 
Distributed Resources: Incentives. 
<http://www.energetics.com/madri/pdfs/nera_0424 
06.pdf>. 

New Mexico, Efficient Use of Energy Act, New Mexico 
Statutes. Chapt. 62-17-2 and Chapt. 62-17-3 
(2005). 

Pennsylvania Alternative Energy Portfolio Standards Act, 
Pennsylvania Act No. 213 (SB 1030) (2004). 
<http://www.legis.state.pa. us/WUOI/LI/BI/BT/2003/0 
/SB1030P1973.HTM>. 

Plunkett, J., Horowitz, R, Slote, S. (2005). Rewarding 
Successful Efficiency Investment in Three 
Neighboring States: The Sequel, the Re-make and 
the Next Generation (In Vermont, Massachusetts 
and Connecticut) A 2004 ACEEE Summer Study on 
Energy Efficiency in Buildings. 
<http://www.aceee.org/conf/04ss/panel5.htm>. 

U.S. Environmental Protection Agency [EPA] (2006). 
Clean Energy-Environment Guide to Action: 

Policies, Best Practices, and Action Steps for States 
(Section 6.2). Washington, DC. 

Vermont Section 248. 30 Vermont Statutes Annotated 
§ 248, 4 (A)(b). New gas and electric purchases, 
investments, and facilities; certificate of public 
good, <http://www.leg.state.vt.us/statutes/fullsec- 
tion.cfm?Title=30&Chapter=005&Section=00248>. 

2005 Wisconsin Act 141 (2005 Senate Bill 459). 

<http://www.legis.state.wi.us/2005/data/acts/05Act 
141 .pdf>. 


To create a sustainable, aggressive national commitment to energy efficiency 


2-19 








































































3 Energy Resource 
! Planning Processes 





including energy efficiency in the resource planning process is essential to realizing its full value and set¬ 
ting resource savings and funding targets accordingly. Many utilities, states, and regions are estimating 
and verifying the wide range of benefits from energy efficiency and are successfully integrating energy 
efficiency into the resource planning process. This chapter of the National Action Plan for Energy Efficiency 
Report discusses the barriers that obstruct incorporating energy efficiency in resource planning and pres¬ 
ents six regional approaches to demonstrate how those barriers have been successfully overcome. 


Overview 

Planning is a core function of all utilities: large and small, 
natural gas and electric, public and private. The decisions 
made in planning affect customer costs, reliability of 
service, risk management, and the environment. Many 
stakeholders are closely involved and participate in plan¬ 
ning processes and related decisions. Active participants 
often include utilities, utility regulators, city councils, 
state and local policy-makers, regional organizations, 
environmental groups, and customer groups. Regional 
planning processes organized through regional transmis¬ 
sion organizations (RTOs) also occur with the collabora¬ 
tions of utilities and regional stakeholders. 

Different planning processes are employed within each util¬ 
ity, state, and region. Depending on a utility's purpose and 
context (e.g., electric or gas utility, vertically integrated or 
restructured), different planning decisions must be made. 
Local and regional needs also affect planning and resource 
requirements and the scope of planning processes. Further, 
the role of states and regions in planning affects decisions 
and prescribes goals for energy portfolios, such as resource 
priority, fuel diversity, and emissions reduction. 

Through different types of planning processes, utilities 
analyze how to meet customer demands for energy and 
capacity using supply-side resource procurement (includ¬ 
ing natural gas supply contracts and building new gener¬ 
ation), transmission, distribution, and demand-side 
resources (including energy efficiency and demand 
response). Such planning often requires iteration and test¬ 
ing to find the combination of resources that offer maxi¬ 
mum value over a range of likely future scenarios, for the 


short- and long-term. The value of each of these resources 
is determined at the utility, local, state and regional level, 
based on area-specific needs and policy direction. In order 
to fully integrate the value of all resources into planning— 
including energy efficiency—resource value and benefits 
must be determined early in the planning process and 
projected over the life of the resource plan. 

Planning processes focus on two general areas: (1) energy- 
related planning, such as electricity generation and 
wholesale energy procurement; and (2) capacity-related 
planning, such as construction of new pipelines, power 
plants, or electric transmission and distribution projects. 
The value of energy efficiency can be integrated into 
resource planning decisions for both of these areas. 


Leadership Group Recommendations 
Applicable to Energy Resource 
Planning Processes 


• Recognize energy efficiency as a high-priority energy 
resource. 

• Make a strong, long-term commitment to implement 
cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of, and opportuni¬ 
ties for, energy efficiency. 

• Provide sufficient, timely, and stable program funding 
to deliver energy efficiency where cost-effective. 

A more detailed list of options specific to the objective 
of promoting energy efficiency in resource planning 
processes is provided at the end of this chapter. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-1 






This chapter identifies common challenges for integrat¬ 
ing energy efficiency into existing planning processes 
and describes examples of successful energy efficiency 
planning approaches that are used in six regions of the 
country. Finally, this chapter summarizes ways to 
address barriers, and offers recommendations and 
several options to consider for specific actions that 
would facilitate incorporation of energy efficiency into 
resource planning. 

Challenges to Incorporating Energy 
Efficiency Into Planning 

The challenges to incorporating energy efficiency into 
resource planning have common themes for a wide 
range of utilities and markets. This section describes these 
challenges in the context of two central questions: 
A) determining the value of energy efficiency in the 
resource planning, and B) setting energy efficiency targets 
and allocating budgets, which are guided by resource 
planning, as well as regulatory and policy decisions. 

Determining the Value of Energy Efficiency 

It is generally accepted that well-designed efficiency 
measures provide measurable resource savings to utili¬ 
ties. However, there are no standard approaches on 
how to appropriately quantify and incorporate those 
benefits into utility resource planning. Also, there are 
many different types of energy efficiency programs 
with different characteristics and target customers. 
Energy efficiency can include utility programs (rebates, 
audits, education, and outreach) as well as building 
efficiency codes and standards improvements for new 
construction. Each type of program has different char¬ 
acteristics that should be considered in the valuation 
process. The program information gathered in an ener¬ 
gy efficiency potential study can be used to create an 
energy efficiency supply curve, as illustrated in Figure 3-1. 


Figure 3-1. Energy Efficiency Supply Curve - Potential 
in 2011 (Levelized Cost in S/kilowatt-hours [kWh] Saved) 



Source: McAuliffe, 2003 


Common Challenges to Incorporating Energy Efficiency 
Into Planning 


A. Determining the Value of Energy Efficiency 


Energy Procurement 


Estimating energy savings 


Valuing energy savings 


Capacity & Resource Adequacy 


Estimating capacity savings 


Valuing capacity benefits 


Factors in achieving benefits 


Other Benefits 


Incorporating non-energy benefits 


B. Setting Targets and Allocating Budget 


Quantity of EE to implement 


Estimating program effectiveness 


Institutional difficulty in reallocating budget 


Cost expenditure timing vs. benefits 


Ensuring program costs are recaptured 


3-2 National Action Plan for Energy Efficiency 










































The analysis commonly used to value energy efficiency 
compares the costs of energy efficiency resources to the 
costs of the resources that are displaced by energy effi¬ 
ciency. The sidebar shows the categories of benefits for 
electric and gas utilities that are commonly evaluated. 
The approach is to forecast expected future costs with 
and without energy efficiency resources and then esti¬ 
mate the level of savings that energy efficiency will pro¬ 
vide. This analysis can be conducted with varying levels 
of sophistication depending on the metrics used to com¬ 
pare alternative resource plans. Typically, the evaluation 
is made based on the expected cost difference; however, 
"portfolio'' approaches also evaluate differences in cost 
variance and reliability, which can provide additional 
rationale for including energy efficiency as a resource. 

The resource benefits of energy efficiency fall into two 
general categories: 

(1) Energy-related benefits that affect the procurement 
of wholesale electric energy and natural gas, and 
delivery losses. 

(2) Capacity-related benefits that affect wholesale elec¬ 
tric capacity purchases, construction of new facilities, 
and system reliability. 

The energy-related benefits of energy efficiency are rela¬ 
tively easy to forecast. Because utilities are constantly 
adjusting the amount of energy purchased, short-term 
deviations in the amount of energy efficiency achieved 
can be accommodated. The capacity-related benefits 
occur when construction of a facility needed to reliably 
serve customers can be delayed or avoided because the 
need has already been met. Therefore, achieving capacity 
benefits requires much more certainty in the future 
success of energy efficiency programs (particularly the 
measures targeting peak loads) and might be harder to 
achieve in practice. However, the ability to provide 
capacity benefits has been a focus in California, the 
Pacific Northwest, and other regions, and it should 
become easier to assess capacity savings as more pro¬ 
grams gain experience, and capacity savings are meas¬ 
ured and verified. Current methods for estimating energy 
benefits and capacity benefits are presented here. 


Estimating Energy Benefits 

Estimating energy benefits requires established methods 
for estimating the quantity of energy savings and the 
benefits of these savings to the energy system. 

•Estimating Quantity of Energy Savings. Savings esti¬ 
mates for a wide variety of efficiency measures have 
been well studied and documented. Approaches to 
estimate the level of free-riders and program partici¬ 
pants who would have implemented the energy effi¬ 
ciency on their own have been established. Similarly, 
the expected useful lives of energy efficiency measures 
and their persistence are commonly evaluated and 
included in the analysis. Detailed databases of efficiency 
measures have been developed for several regions, 
including California and the Pacific Northwest. 
However, it is often necessary to investigate and vali¬ 
date the methods and assumptions behind those esti¬ 
mates to build consensus around measured savings 
that all stakeholders find credible. Savings estimates 
can be verified through measurements and load 
research. Best practices for measurement and verifica¬ 
tion (M&V) are discussed in more detail in Chapter 6: 
Energy Efficiency Program Best Practices. 


Benefits of Energy Efficiency in 

Resource Planning 


Electricity 

Natural Gas 

Energy-related 

benefits 

Reduced wholesale energy 
purchases 

Reduced wholesale natural 
gas purchases 

Reduced line losses 

Reduced losses and 
unaccounted for gas 

Reduced air emissions 

Reduced air emissions 

Capacity- 

related 

benefits 

Generation capacity/ 
resource adequacy/ 
regional markets 

Production and liquified 
natural gas facilities 

Operating reserves and 
other ancillary services 

Pipeline capacity 

Transmission and 
distribution capacity 

Local storage and pressure 

Other benefits 

Market price reductions (consumer surplus) 

Lower portfolio risk 

Local/in-state jobs 

Low-income assistance and others 


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3-3 


















•Quantifying Value of Energy Savings. The most readily 
available benchmark for the value of energy savings is 
the prevailing price of wholesale electricity and natural 
gas. Even for a vertically integrated utility with its own 
production, energy efficiency might decrease the need 
to make market purchases; or if the utility has excess 
energy, energy efficiency can allow the utility to sell 
more into the market. In cases when the market prices 
are not appropriate benchmarks (because of contract 
limitations on reselling energy or limited market 
access), contract prices or production costs can be 
used. In addition, the value of losses and other variable 
costs associated with energy delivery can be quantified 
and are well known. 

The challenge that remains is in forecasting future energy 
costs beyond the period when market data are available 
or contracts are in place. Long-run forecasts vary in com¬ 
plexity from a simple escalation rate to market-based 
approaches that forecast the cost of new resource addi¬ 
tions, to models that simulate the system of existing 
resources (including transmission constraints) and evalu¬ 
ate the marginal cost of operating the system as new 
generation is added to meet the forecasted load growth. 
Most utilities have an established approach to forecast 
long-term market prices, and the same forecasting tech¬ 
nique and assumptions should be used for energy effi¬ 
ciency as are used to evaluate supply-side resource 
options. In addition to a forecast of energy prices, some 
regions include the change in market prices as a result of 
energy efficiency. Estimating these effects requires mod¬ 
eling of complex interactions in the energy market. 
Furthermore, reduced market prices are not necessarily a 
gain from a societal perspective, because the gains of 
consumers result in an equal loss to producers; therefore, 
whether to include these savings is a policy decision. 

Estimating Capacity Benefits 

Estimating capacity benefits requires estimating the level 
of capacity savings and the associated benefits. If energy 
efficiency's capacity benefits are not considered in the 
resource plan, the utility will overinvest in capital assets, 


such as power plants and transmission and distribution, 

and underinvest in energy efficiency. 

• Estimating Capacity Savings. In addition to energy sav¬ 
ings, electric efficiency reduces peak demand and the 
need for new investments in generation, transmission, 
and distribution infrastructure. Natural gas efficiency 
can reduce the need for a new pipeline, storage, 
liquefied natural gas (LNG) facility, or other invest¬ 
ments necessary to maintain pressure during high-load 
periods. Because of the storage and pressure variation 
possible in the natural gas system, capacity-related 
costs are not as extreme in the natural gas system as 
they are for electricity. In both cases, estimating reduc¬ 
tions of peak demand is more difficult for electricity 
than it is for natural gas, and timing is far more critical. 
For peak demand savings to actually be realized, the 
targeted end-use load reductions must occur, and the 
efficiency measure must provide savings coincident 
with the utility's peak demand. Therefore, different 
energy efficiency measures that reduce load at different 
times of day (e.g., commercial vs. residential lighting) 
might have different capacity values. Area- and time- 
specific marginal costing approaches have been devel¬ 
oped to look at the value of coincident peak load 
reductions, which have significantly higher value 
during critical hours and in constrained areas of the 
system (see sidebar on page 3-5). 

A critical component of the resource planning process, 
whether focused on demand- or supply-side resources, 
is accurate, unbiased load forecasting. Inaccurate load 
forecasts either cause excessive and expensive invest¬ 
ment in resources if too aggressive, or create costly 
shortages if too low. Similarly, tracking and validation 
of energy efficiency programs are important for 
increasing the accuracy of estimates of their effects in 
future resource plans. 

Estimating the capacity savings to apply to load growth 
forecasts requires estimating two key factors. The first 
is determining the amount of capacity reduced by 
energy efficiency during critical or peak hours. The 


3-4 National Action Plan for Energy Efficiency 


second factor is estimating the "equivalent reliability" 
of the load reduction. This measure captures both the 
probability that the savings will actually occur, and that 
the savings will occur during system-constrained hours. 
Applying estimates of equivalent reliability to various 
types of resources allows comparison on an equal basis 
with traditional capacity investments. This approach is 
similar in concept to the equivalent capacity factor 
used to compare renewable resources such as wind 


and solar with traditional fossil-fueled generation. In 
markets where capacity is purchased, "counting" rules 
for different resource types determine the equivalent 
reliability. The probability that savings will actually 
occur during peak periods is easier to estimate with 
some certainty for a large number of distributed effi¬ 
ciency measures (e.g., air conditioners) as opposed to a 
limited number of large, centralized measures (e.g., 
water treatment plants). 


California Avoided Costs by Time and Location 


California is a good example of the effect of area and 
time-differentiation for efficiency measures that have 
dramatically different impact profiles. The average 
avoided cost for efficiency (including energy and capacity 
cost components) in California is $71/megawatt-hour 
(MWh). Applying avoided costs for each of six time of 
use (TOU) periods (super-peak, mid-peak and off-peak 


Comparison of Avoided Costs for 
Three Implementation Approaches 



□ Hourly □ TOU Average □ Annual Average 


for summer and winter seasons) increases the value of 
air conditioning to $104/MWh or 45 percent and low¬ 
ers the value of outdoor lighting to $57/MWh or 20 per¬ 
cent. Refrigeration, with its consistent load profile 
throughout the day and year, is unaffected. Applying 
avoided costs by hour captures the extreme summer 


peak prices and increases the value of air conditioning 
savings still further to $123/MWh. Incorporating hourly 
avoided costs increases the total benefits of air condi¬ 
tioning load reduction by more than $50/MWh. This 
type of hourly analysis is currently being used in 
California's avoided cost proceedings for energy 
efficiency. 


Greater San Francisco Bay Area Avoided 
Distribution Costs 



Avoided distribution capacity costs are also estimated by 
region in California. The Greater San Francisco Bay Area 
region is shown above in detail. In San Francisco and 
Oakland, avoided capacity costs are low because those 
areas are experiencing little load growth and have little 
need for new distribution investment. The Stockton 
area, on the other hand, is experiencing high growth 
and has significant new distribution infrastructure 
requirements. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-5 
















































• Valuing Capacity Benefits. The value of capacity bene¬ 
fits lies in the savings of not having to build or purchase 
new infrastructure, or make payments to capacity mar¬ 
kets for system reliability. Because reliability of the 
nation's energy infrastructure is critical, it is difficult to 
make the decision to defer these investments without 
some degree of certainty that the savings will be 
achieved. Disregarding or undervaluing the transmis¬ 
sion and generation capacity value of energy efficiency 
can, however, lead to underinvestment in energy effi¬ 
ciency. Realizing energy efficiency's capacity savings 
requires close coordination between efficiency and 
resource planners 1 to ensure that specific planned 
investments can actually be deferred as a result of 
energy efficiency programs. In the long term, lower 
load levels will naturally lead to lower levels of infra¬ 
structure requirements without a change in existing 
planning processes. 

Targeted implementation of energy efficiency designed 
to defer or eliminate traditional reliability investments in 
the short term (whether generation, transmission, or dis¬ 
tribution) requires that energy efficiency ramp up in time 
to provide sufficient peak load savings before the new 
infrastructure is needed. States with existing efficiency 
programs can use previous experience to estimate future 
adoption rates. In states that do not have previous expe¬ 
rience with energy efficiency, however, the adoption rate 
of efficiency measures is difficult to estimate, making it 
hard to precisely quantify the savings that will be 
achieved by a certain date. Therefore, if the infrastruc¬ 
ture project is critical for reliability, it is difficult to rely on 
energy as an alternative. The value of the targeted 
reductions and project deferrals can also be a challenge 
to quantify because of the uncertainty in the future 
investment needs and costs. However, there are exam¬ 
ples of how to overcome this challenge, such as the 
Bonneville Power Administration (BPA) transmission 
planning process (described later). Vermont Docket 7081 
is another collaborative process—initiated at the direc¬ 


tion of the legislature—that is working on a new trans¬ 
mission planning process that will explicitly incorporate 
energy efficiency (Vermont Public Service Board, 2005). 
Both BPA and Vermont Docket 7081 stress the need to 
start well in advance of the need for reductions to allow 
the energy efficiency program to be developed and vali¬ 
dated. In addition, by starting early, conventional alter¬ 
natives can serve as a back-stop if needed. Starting early 
is also easier organizationally if alternatives are initiated 
before project proponents are vested in building new 
transmission lines. 

The deferral of capacity expenditures can produce the 
same reliability level for customers. In cases when an 
energy efficiency program changes the expected reliability 
level (either higher or lower), the value to customers 
must be introduced as either a benefit or cost. A typical 
approach is to use the customer's Value of Lost Load 
(VOLL) as determined through Value of Service (VOS) 
studies and multiply by the expected change in customer 
outage hours. However, VOS studies based on customer 
surveys typically show wide-ranging results and are often 
difficult to substantiate. 

In regions with established capacity markets, the valua¬ 
tion process is easier because the posted market prices 
are the value of capacity. The approach to value these 
benefits is therefore similar to the market price forecasting 
approach described to value energy benefits. Regional 
planning processes can also include energy efficiency in 
their resource planning. Regional electricity planning 
processes primarily focus on developing adequate 
resources to meet regional reliability criteria as defined in 
each of the North American Electric Reliability Council 
(NERC) regions. Establishing capacity and ancillary serv¬ 
ice market rules that allow energy efficiency and 
customer load response to participate can bring energy 
efficiency into the planning process. For example, 
Independent System Operator New England (ISO-NE) 
Demand Resources Working Group will be including 


1 The transmission planning process requires collaboration of regional stakeholders including transmission owners, utilities, and regulators. Distribution 
planning departments of electric utilities typically make the decisions for distribution-level and local transmission facilities. Planning and development of 
high-voltage transmission facilities on the bulk-supply system is done at the independent system operator (ISO)/RTO and North American Electric 
Reliability Council (NERC) regional levels. At a minimum, transmission adequacy must uphold the established NERC reliability standards. 


3-6 National Action Plan for Energy Efficiency 



energy efficiency and demand response as qualifying 
resources for the New England Forward Capacity 
Market. Another example is PJM Interconnection (PJM), 
which has recently made its Economic Load Response 
Program a permanent feature of the PJM markets (in 
addition to the Emergency Load Response Program that 
was permanently established in 2002) and has recently 
opened its Synchronized and Non-Synchronized Reserve 
markets to demand response providers. 

Other Benefits 

Energy efficiency provides several types of non-energy 
benefits not typically included in traditional resource 
planning. These benefits include environmental improve¬ 
ment, support for low-income customers, economic 
development, customer satisfaction and comfort, and 
other potential factors such as reduced costs for bill col¬ 
lection and service shut-offs, improvements in household 
safety and health, and increased property values. As an 
economic development tool, energy efficiency attracts 
and retains businesses, creates local jobs, and helps busi¬ 
ness competitiveness and area appeal. 

Environmental benefits, predominantly air emissions 
reductions, might or might not have specific economic 
value, depending on the region and the pollutant. The 
market price of energy will include the producer's costs 
of obtaining required emission allowances (e.g., nitrogen 
oxides [NO x ], sulfur dioxide [S0 2 ]), and emission reduc¬ 
tion equipment. Emissions of carbon dioxide (C0 2 ), also 
are affected by planning decisions of whether to consider 
the value of unregulated emissions. The costs of C0 2 
were included in California's assessment of energy effi¬ 
ciency on the basis that these costs might become priced 
in the future and the expected value of future C0 2 prices 
should be considered when making energy efficiency 
investments. 2 Even without regulatory policy guidance, 
several utilities incorporate the estimated future costs of 
emissions such as C0 2 into their resources planning 
process to control the financial risks associated with 
future regulatory changes. 3 For example, Idaho Power 


Company includes an estimated future cost of C0 2 emis¬ 
sions in its resource planning, and in determining the 
cost-effectiveness of efficiency programs. 

Many of these benefits do not accrue directly to the utility, 
raising additional policy and budgeting issues regarding 
whether, and how, to incorporate those benefits for 
planning purposes. Municipal utilities and governmental 
agencies have a stronger mandate to include a wider 
variety of non-energy benefits in energy efficiency plan¬ 
ning than do investor-owned utilities (lOUs). Regulators 
of lOUs might also determine that these benefits should 
be considered. Many of the benefits are difficult to 
quantify. However, non-energy benefits can also be con¬ 
sidered qualitatively when establishing the overall ener¬ 
gy efficiency budget, and in developing guidelines for 
targeting appropriate customers (e.g., low income or 
other groups). 

Setting Energy Efficiency Targets and 
Allocating Budget 

One of the biggest barriers to energy efficiency is devel¬ 
oping a budget to fund energy efficiency, particularly at 
utilities or in states that haven't had significant pro¬ 
grams, historically. This is a not strictly a resource plan¬ 
ning issue, but a regulatory, policy, and organizational 
issue as well. The two main organizational approaches 
for funding energy efficiency are resource planning 
processes, which establish the energy efficiency budget 
and targets within the planning process, and public 
goods-funded charges, which create a separate budget 
to support energy efficiency through a rate surcharge. 
There are successful examples of both approaches, as 
well as examples that use both mechanisms (California, 
BPA, PacifiCorp, and Minnesota). 

Setting targets for energy efficiency resource savings and 
budgets is a collaborative process between resource 
planning staff, which evaluates cost-effectiveness, and 
other key stakeholders. Arguably, all energy efficiency 


2 California established a cost of $8/ton of C02 in 2004, escalating at 5% per year (CPUC, 2005). 

3 For further discussion, see Bokenkamp, et al., 2005. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-7 



measures identified as cost effective in an integrated 
resource plan (IRP) should be implemented. 4 In practice, 
a number of other factors must be considered. For example, 
the achievable level of savings and costs, expertise and 
labor, and ability to ramp up programs also affects the 
size, scope, and mix of energy efficiency programs. All of 
these considerations, plus the cost-effectiveness of ener¬ 
gy efficiency, should be taken into account when estab¬ 
lishing the funding levels for energy efficiency. The fund¬ 
ing process might also require an iterative process that 
describes the alternative plans to regulators and other 
stakeholders. Some jurisdictions use a policy directive 
such as "all cost-effective energy efficiency" (California) 
while others allocate a fixed budget amount (New York), 
specify a fixed percentage of utility revenue (Minnesota 
and Oregon), or a target load reduction amount (Texas). 

Implementation of a target for electric and gas energy 
savings, or Energy Efficiency Resources Standard (EERS) 
or Energy Efficiency Portfolio Standard (EEPS), such as 
the Energy Efficiency Goal adopted in Texas (PUCT Subst. 
R. §25.181), is an emerging policy tool adopted or being 
considered in a number of states (ACEEE, 2006). Some 
states have adopted standards with flexibility for how 
utilities meet such targets, such as savings by end users, 
improvements in distribution system efficiency, and 
market-based trading systems. 

Resource Planning Process 

If energy efficiency is considered as a resource, then the 
appropriate amount of energy efficient funding will be 
allocated through the utility planning process, based on 
cost-effectiveness, portfolio risk, energy and capacity 
benefits, and other criteria. Many utilities find that a 
resource plan that includes energy efficiency yields a 
lower cost portfolio, so overall procurement costs should 
decline more than the increase in energy efficiency 
program costs, and the established revenue requirement 
of the utility will be sufficient to fund the entire supply 
and demand-side resource portfolio. 


A resource planning process that includes energy effi¬ 
ciency must also include a mechanism to ensure cost- 
recovery of energy efficiency spending. Most resource 
planning processes are collaborative forums to ensure 
that stakeholders understand and support the overall 
plan and its cost recovery mechanism. In some cases, 
utility costs might have to be shifted between utility 
functions (e.g., generation and transmission) to enable 
cost recovery for energy efficiency expenditures. For 
example, transmission owners might not see energy effi¬ 
ciency as a non-wires solution to transmission system 
deficiencies because it is unclear to what extent energy 
efficiency costs can be collected in the Federal Energy 
Regulatory Commission (FERC) transmission tariff. 
Therefore, even if energy efficiency is less costly than the 
transmission upgrade, it is unclear whether the transmis¬ 
sion upgrade budget can be shifted to energy efficiency 
and still collected in rates. Another challenge for collecting 
efficiency funding in the transmission tariff is allocation 
of energy efficiency costs across multiple transmission 
owners, particularly if energy efficiency costs are 
incurred by a single transmission owner, while transmis¬ 
sion costs are shared among several owners. 

These examples demonstrate that in order to implement 
integrated resource planning, the regulatory agency 
responsible for determining rates must allow rates 
designed to support transmission, distribution, or other 
functions to be used for efficiency. The transmission 
companies in Connecticut have been allowed to include 
reliability-driven energy efficiency in tariffs, although this 
is noted as an emergency situation not to be repeated as 
a normal course of business. These interactions between 
regulatory policy and utility resource planning demon¬ 
strate that utilities cannot be expected to act alone in 
increasing energy efficiency through their planning 
process. 

Public Purpose- or System Benefits Charge-Funded 
Programs 

One way to fund energy efficiency is to develop a separate 
funding mechanism, collected in rates, to support 


4 Established cost-effectiveness tests, such as the total resource cost (TRC) test, are commonly used to determine the cost-effectiveness of energy efficiency 
programs. Material from Chapter 6: Energy Efficiency Program Best Practices describes these tests in more detail. 


3-8 National Action Plan for Energy Efficiency 





investment in energy efficiency. In deregulated markets 
with unbundled rates, this mechanism can appear as a 
separate customer charge, often referred to as a system 
benefits charge (SBC). Establishing a public purpose 
charge has the advantage of ensuring policy-makers that 
there is an allocation of funding towards energy efficiency, 
and can be necessary in deregulated markets where the 
delivery company cannot capture the savings of energy 
efficiency. This approach separates the energy efficiency 
budget from the resource planning process, however. 

Developing a new rate surcharge or expanding an 
existing surcharge also raises many of the questions 
addressed in Chapter 2: Utility Ratemaking & Revenue 
Requirements. For example, are the customer segments 
paying into SBCs receiving a comparable level of energy 
efficiency assistance in return, or are the increases a 
cross-subsidy? Often, industrial customers prefer to 
implement their own efficiency rather than contribute to 
a pool. Also, if the targets are used to set shareholder 
incentives, the incentives should be appropriate for the 
aggressiveness of the program. Additionally, because the 
targeted budget allocation in public purpose-funded 
programs is often set independently of the utility's overall 
resource planning process (and is not frequently 
changed), utilities might not have funding available to 
procure all cost-effective savings derived from energy 
efficiency measures. This type of scenario can result in 
potentially higher costs for customers than would occur 
if each cost-effective efficiency opportunity were pursued. 

Overcoming Challenges: Alternative 
Approaches 


Successful incorporation of energy efficiency into the 
resource planning process requires utility executives, 
resource planning staff, regulators, and other stakeholders 
to value energy efficiency as a resource, and to be com¬ 
mitted to making it work within the utility or regional 
resource portfolio. To illustrate approaches to overcoming 
these barriers, we highlight several successful energy 
efficiency programs by California, the New York State 


Energy Research and Development Authority (NYSER- 
DA), BPA, Minnesota, Texas, and PacifiCorp. The energy 
efficiency programs in these six regions demonstrate sev¬ 
eral different ways to incorporate energy efficiency into 
planning processes; in each example, the economics 
generally work well for efficiency programs. 

The primary driver of energy efficiency in planning is the 
low levelized cost of energy savings. Table 3-1 shows the 
reported levelized cost of electricity and natural gas effi¬ 
ciency from three of the regions surveyed. The reported 
utility cost of efficiency ranges between $0.01/kilowatt- 
hour (kWh) and $0.03/kWh for Pacific Gas & Electric 
(PG&E), NYSERDA, and the Northwest Power and 
Conservation Council (NWPCC). When including both 
utility program costs and customer costs, the range is 
$0.03/kWh to $0.05/kWh. The range of reported benefits 
for electric energy efficiency is from $0.06/kWh to 
$0.08/kWh. For natural gas, only P&GE reported specific 
natural gas efficiency measures; these show similarly low 
levelized costs relative to benefits. 


Table 3-1: Levelized Costs and Benefits From Four Regions 



Electric ($/kWh) 

Natural Gas ($/therm) 


Utility 

Cost 

Utility & 
Customer 
Cost 

Benefit 

Utility 

Cost 

Utility & 
Customer 
Cost 

Benefit 

PG&E i 

0.03 

0.05 

0.08 

0.28 

0.56 

0.81 

NYSERDA 2 

0.01 

0.03 

0.06 

N/A 

N/A 

N/A 

NWPCC 3 

0.024 

N/A 

0.060 

N/A 

N/A 

N/A 

Texas 4 

0.025 

N/A 

0.0606 

N/A 

N/A 

N/A 


1 PG&E, 2005 

2 NYSERDA, 2005 

3 NWPCC, 2005 

4 Calculated based on Texas Utility Avoided Cost (PUCT Substantive Rule 
§25.18 of 2000). $0.0268/kWh for energy and $78.50/kW-year for 
capacity converted to $/kWh based on assumption of 10-year measure 
life, load factor of 26.4 percent, which is calculated from Texas' 2004 
efficiency-based reductions of 193 MW of peak demand and 448 GWh 
of energy (Frontier Associates, 2005). 

5 Based on 2004 spending of $87 million, 448 GWh annual. Assumed life 
of 10 years (PUCT Substantive Rule §25.181 of 2000). 

6 Based on Public Utility Commission of Texas (PUCT) Deemed Avoided 
Costs of $0.0268/kWh for energy and $78.50/kW-year for capacity; 
448GWh and 193MW of peak load reduction. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-9 





















California 

California has had a continued commitment to energy 
efficiency since the late 1970s. Two major efforts are cur¬ 
rently being coordinated in the state that address energy 
use in new buildings as well as efficiency upgrades in 
existing buildings. Figure 3-2 shows the policy structure, 
with the California Energy Commission (CEC) leading 
the building codes and standards process, and the 
California Public Utility Commission (CPUC) leading the 
IOU and third-party administered efficiency programs. 
Jointly, the agencies publish the Energy Action Plan that 
explicitly states a goal to integrate "all cost-effective 
energy efficiency." Recently, the CPUC approved an effi¬ 
ciency budget of $2 billion over the next three years to 
serve a population of approximately 35 million. 


The process for designing and implementing efficiency 
programs in California by the lOUs is to develop the pro¬ 
grams (either by the utility or through third-party solici¬ 
tation), evaluate cost-effectiveness, establish and gain 
approval for the program funding, and evaluate the pro¬ 
gram's success through M&V. Figure 3-2 illustrates this 
approach. 

Table 3-2 describes how California addresses barriers for 
incorporating energy efficiency in planning for the IOU 
process. 


Figure 3-2. California Efficiency Structure Overview 


New Construction 
and Appliance Standards 

I 

Title 24 Building Standards for 
New Construction 

Establish Codes 
Set Avoided Costs 
Time-Dependent Valuation 
Set Process for Compliance 

Architects and Building Designers 

Evaluate energy standard compliance 

City and County Building Inspectors 

Enforce compliance 


California California 

Energy Public Utility 

Commission Commission 


Energy Action Plan II 

Joint Agency Plan on Specific 

Actions 

KEY ACTIONS: 

Require that all cost-effective 
energy efficiency is integrated into 
utilities' resource plans as the first 
option in the resource loading 
order on an equal basis with 
supply-side resources. 


Public Purpose Fund Program 
and Procurement Funding 

1 

CPUC Efficiency Program 

Approval of Plans and Budget 
(Public Purpose) 

$2 Billion over the next 3 years 
Establish Savings Targets 
MW and MWh 
Decoupling 

Shareholder Incentives 
(upcoming proceeding) 

Avoided Costs 

Establish cost-effectiveness 

Investor-Owned Utilities 

Develop and Administer Programs 
Third-Party Implementer Solicitation 
Measurement and Verification 
Solicitation 
Regulatory Reporting 

Third-Party Program Implementers 
and M&V Contractors 


Source: Energy and Environmental Economics, Inc. 


3-10 National Action Plan for Energy Efficiency 










Figure 3-3. California Investor-Owned Utility (IOU) Process 



CPUC Avoided 
Costs 

Resources and 
Ramp-up Limits 




i 

I 



Energy 
► Efficiency 

Programs 

Evaluate Program 
Cost Effectiveness 

Rank and 
Estimate Potential 
for Cost Effective 
Portfolios 

Determine Target 
Funding Level 
(through CPUC 
process) 

Implement 
Approved 
Programs to 
Approved Levels 


1 


Perform M&V 
and Adjust 
Programs for 
Next Year 


Source: Energy and Environmental Economics, Inc. 


Table 3-2. Incorporation of Energy Efficiency in California's Investor-Owned Utilities' Planning Processes 


Barriers 


California CPUC-Administered Programs 


A. Determining the Value of Energy Efficiency 


Energy Procurement 


Estimated energy savings 

Customer adoption rates are forecast into the energy efficiency plans with monthly or quarterly reporting of program 
success for tracking. 

Valuing energy savings 

Energy savings are based on market prices of future electricity and natural gas, adjusted by loss factors. Emission savings 
are based on expected emission rates of marginal generating plants in each hour (electricity) or emissions for natural gas. 


Capacity & Resource Adequacy 


Estimating capacity savings 

Capacity savings are evaluated using the load research data for each measure. 

Valuing capacity benefits 

Each capacity-related value is estimated by climate zone of the state and incorporated into an "all-in" energy value. 
Transmission and distribution capacity for electricity is allocated based on weather in each climate zone, and by season 
for natural gas. California's energy market (currently) includes both energy and capacity so there is no explicit capacity 
value for electric generation. 

Factors in achieving benefits 

Capacity benefits are based on the best forecast of achieved savings. There is no explicit link between forecasted benefits of 
energy efficiency and actual capacity savings. 

Other Benefits 

Incorporating non-energy benefits 

Non-energy benefits are considered in the development of the portfolio of energy efficiency, but not explicitly quantified 
in the avoided cost calculation. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 
implement 

CPUC has approved budget and targets for the state's efficiency programs, which are funded through both a public purpose 
charge and procurement funding. 

Estimating program effectiveness 

A portion of the public purpose funds are dedicated to evaluation, measurement, and verification with the goal of 
improving the understanding and quantification of savings and benefit estimates. 

Institutional difficulty in 
reallocating budget 

By using public purpose funds, budget doesn't have to be reallocated from other functions for energy efficiency. 

Cost expenditure timing vs. benefits 

Capacity benefits are based on the best forecast of achieved savings. 

Ensuring the program costs are 
recaptured 

CPUC requires that the utilities integrate energy efficiency into their long-term procurement plans to address this issue. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-11 

































Bonneville Power Administration Transmission 
Planning and Regional Roundtable 

In the Northwest, BPA has been leading an industry 
roundtable to work with distribution utilities, local and 
state government, environmental interests, and other 
stakeholders to incorporate energy efficiency and other 
distributed energy resources (DER) into transmission 
planning. DER includes energy efficiency as well as distri¬ 
bution generation and other nonwires solutions. Figure 
3-4 illustrates the analysis approach and data sources. 
Within BPA, the Transmission Business Line (TBL) works 
with the energy efficiency group in Power Business Line 


(PBL) to develop an integrated transmission plan. The 
process includes significant stakeholder contributions in 
both input data assumptions (led by NWPCC) and in 
reviewing the overall analysis at the roundtable. 5 

Table 3-3 describes how BPA works with stakeholders to 
address barriers for incorporating energy efficiency in 
planning processes. 


Figure 3-4. BPA Transmission Planning Process 



Source: Energy and Environmental Economics, Inc. 


5 NWPCC conducts regional energy efficiency planning. More information can be found at <http://www.nwcouncil.org>. 


3-12 National Action Plan for Energy Efficiency 



















Table 3-3. Incorporation of Energy Efficiency in BPA's Planning Processes 

Barriers 

BPA-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimated energy savings 

The process uses the NWPCC database to define the measure impact and costs. NWPCC maintains a publicly available 
regional efficiency database that is well regarded and has its own process for stakeholder collaboration. Adoption rates 
are estimated based on a range of historical program success. 

Valuing energy savings 

Energy savings are valued based on the NWPCC long-run forecast of energy value for the region, plus marginal losses. 

Capacity & Resource Adequacy 

Estimating capacity savings 

Capacity savings are based on expected NWPCC efficiency measure coincident peak impacts. 

Valuing capacity benefits 

The deferral value of transmission investments is used to evaluate the transmission capacity value, which is the focus of 
these studies. The approach is to calculate the difference in present value revenue requirement before and after the 
energy efficiency investment (Present Worth Method). 

Factors in achieving benefits 

The BPA energy efficiency and transmission planning staff work together to ensure that the revised plan with Non- 
Construction Alternatives (NCAs) satisfies reliability criteria. Ultimately the decision to defer transmission and rely on 
NCAs will be approved by transmission planning. 

Other Benefits 

Incorporating non-energy benefits 

The analysis includes an evaluation of the environmental externalities, but no other non-energy benefits. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 
implement 

The target for NCAs is established by the amount of load that must be reduced to defer the transmission line and maintain 
reliability. This target is driven by the load growth forecasts of the utilities in the region. 

Estimating program effectiveness 

BPA has been doing demonstrations and pilots of high-potential NCAs to refine the estimates of program penetration, 
cost, necessary timeline for achieving load reductions, customer acceptance, and other factors. The results of these pilots 
will help to refine the estimates used in planning studies. 

Institutional difficulty in 
reallocating budget 

If NCAs have lower cost than transmission, transmission capital budget will be reallocated to support NCA investments 
up to the transmission deferral value. Additional costs of NCAs that are justified based on energy value are supported by 
other sources (BPA energy efficiency, local utility programs, and customers). 

Cost expenditure timing vs. benefits 

Both transmission and NCAs require upfront investments so there is no significant time lag between costs and benefits. 
The transmission savings benefit is achieved concurrently with the decision to defer the transmission investment. Energy 
benefits, on the other hand, occur over a longer timeframe and are funded like other energy efficiency programs. 

Ensuring the program costs are 
recaptured 

By developing an internal planning process to reallocate budget, it is easier to ensure that the savings occur. 


New York State Energy Research and 
Development Authority (NYSERDA) 

In the mid-1990s, New York restructured the electric util¬ 
ities and moved responsibility for implementing energy 
efficiency programs to the NYSERDA. The following 
figure shows an overview of the NYSERDA process. The 
programs are funded through the SBC funds (approxi¬ 
mately $175 million per year), and NYSERDA reports on 
the program impact and cost-effectiveness to the New 
York State Public Service Commission (NYS PSC) 
annually. 

Table 3-4 describes how NYSERDA addresses the barriers 
to implementing energy efficiency. 


Figure 3-5. New York Efficiency Structure Overview 


New York State Energy 
Research and 
Development 
Authority (NYSERDA) 

Develop and implement 
efficiency programs 
(~$175 million/year) 

Report on program 
cost-effectiveness 


New York State Public 
Service Commission 
(NYS PSC) 

Review and monitor 
program performance 

Establish system 
benefits charge (SBC) 

Set demand reduction 
charges 


New York Distribution Utilities 

(Central Hudson, Con Edison, 
NYSEG, Niagara Mohawk, Orange 
and Rockland, and Rochester Gas 
and Electric) 

Collect system benefits charge (SBC) 


Source: Energy and Environmental Economics, Inc. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-13 





































Table 3-4. Incorporation of Energy Efficiency in NYSERDA's Planning Processes 


Barriers 

A. Determining the Value of Energy Efficiency 


NYSERDA-Administered Programs 


Energy Procurement 


Estimating energy savings 

NYSERDA internally develops estimates of savings for individual energy efficiency programs and the portfolio in aggre¬ 
gate. In addition, NYSERDA accounts for free-riders and spillover effects ("net to gross" ratio) when estimating energy 
savings. Savings estimates are verified and refined with an M&V program. 

Valuing energy savings 

A long-run forecast of electricity demand is developed using a production simulation model, which is then calibrated to 
market prices. An estimate of reduced market prices due to decreased demand is also included as a benefit. 


Capacity & Resource Adequacy 


Estimating capacity savings 

Similar to energy savings, capacity savings are estimated for individual energy efficiency programs and the portfolio in 
aggregate. Savings estimates are verified and refined with an M&V program. 

Valuing capacity benefits 

The value of generation capacity in New York is established by examining historical auction clearing prices in the 

NYlSO's unforced capacity market. The baseline values are then escalated over time using a growth rate derived from 
NYSERDA's electric system modeling results. These capacity costs are used to value those NYSERDA programs that effec¬ 
tively lower system peak demand. 

Factors in achieving benefits 

The capacity value is included as the best estimate of future capacity savings by New York utilities. There is no direct 
link, however, between the forecasted savings and the actual change in utility procurement budgets. 

Other Benefits 

Incorporating non-energy benefits 

The cost-effectiveness of NYSERDA programs is estimated using four scenarios of increasing NEB levels from (1) energy 
savings benefits, (2) adding market price effects, (3) adding non-energy benefits, and (4) adding macro-economic effects 
of program spending. 


B. Setting Energy Efficiency Targets 


Quantity of energy efficiency to 
implement 

The overall size of the NYSERDA program is determined by the aggregate funding level established by the NYS PSC. 
NYSERDA, with advice from the SBC Advisory Group, recommends specific sub-program funding levels for approval by 
the staff at NYS PSC. 

Estimating program effectiveness 

NYSERDA prepares an annual report on program effectiveness including estimated and verified impacts and cost effec¬ 
tiveness, which is then reviewed by the SBC Advisory Group and submitted to the NYS PSC. 

Institutional difficulty in 
reallocating budget 

By establishing a separate state research and development authority to administer energy efficiency, the institutional 
problems of determining and allocating budget towards energy efficiency are eliminated. NYSERDA is supported 
primarily by SBCs collected by the utilities at the direction of NYS PSC. 

Cost expenditure timing vs. benefits 

Similarly, by funding the programs through an SBC, the customers are directly financing the program, thereby making 
the timing of benefits less important. 

Ensuring the program costs are 
recaptured 

Forecasts of savings are based on the best estimate of future savings. There is no direct link to ensure these savings 
actually occur. 


Minnesota 

The Minnesota legislature passed the Conservation 
Improvement Program (CIP) in 1982. State law requires 
that (1) electric utilities that operate nuclear-power 
plants devote at least 2 percent of their gross operating 
revenue to CIP, (2) other electric utilities devote at least 
1.5 percent of their revenue, and (3) natural gas utilities 
devote at least 0.5 percent. Energy is supplied predomi¬ 
nantly by two utilities: Xcel, which provides 49 percent 
of the electricity and 25 percent of the natural gas, and 
CenterPoint Energy, which provides 45 percent of the 
natural gas. Facilities with a peak electrical demand of at 
least 20 megawatts (MW) are permitted to opt out of 
CIP and avoid paying the program's rate adjustment in 


their electric and natural gas bills (10 facilities have done 
so). While the Minnesota Department of Commerce 
oversees the CIP programs of all utilities in the state, the 
department only has the authority to order changes in 
the programs of the lOUs. 

Utilities are required to file an IRP every 2 years, using 
5-, 10- and 15-year planning horizons to determine the 
need for additional resources. The statutory emphasis is 
on demand-side management (DSM) and renewable 
resources. A utility must first show why these resources 
will not meet future needs before proposing traditional 
utility investments. The plans are reviewed and approved 
by the Minnesota Public Utilities Commission. CIP is the 


3-14 National Action Plan for Energy Efficiency 




























Barriers 


Table 3-5. Incorporation of Energy Efficiency in Minnesota's Planning Processes 


Minnesota-Administered Programs 


A. Determining the Value of Energy Efficiency 


Energy Procurement 


Estimating energy savings 

Energy savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates 

Valuing energy savings 

that are not consistent. Energy costs are considered a trade secret and not disclosed publicly. 


Capacity & Resource Adequacy 


Estimating capacity savings 

Capacity savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates 
that are not consistent. Power plant, transmission, and distribution costs are considered trade secrets and are not 
disclosed publicly. 

Valuing capacity benefits 

Factors in achieving benefits 

There is no direct link between the forecasted capacity savings and the actual change in utility procurement budgets. 

Other Benefits 

Incorporating non-energy benefits 

Differences in the utilities' valuation methods produce varying estimates. In addition, the Department of Commerce 
incorporates an externality avoided cost in the electric societal cost benefit test, providing utilities with values in $/ton 
for several emissions, which the utilities translate to amounts in $/MWh based on each utility's emissions profile. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 
implement 

The Department of Commerce approves budget and targets for each utility. Funding levels are determined by state law, 
which requires 0.5 percent to 2 percent of utility revenues be dedicated to conservation programs, depending on the 
type of utility. 

Estimating program effectiveness 

Program effectiveness is handled by each utility. Minnesota's lOUs rely on the software tools DSManager and BENCOST 
to measure electric and gas savings respectively. 

Institutional difficulty in 
reallocating budget 

Budget is not reallocated from other functions. Funding is obtained via a surcharge on customer bills. 

Cost expenditure timing vs. benefits 

By using a percentage of revenue set-aside, utility customers are directly financing the program; therefore timing of 
benefits is not critical. 

Ensuring the program costs are 
recaptured 

State law requires that each utility file an IRP with the Public Utilities Commission. The conservation plans approved by 
the Department of Commerce are the primary mechanism by which utilities meet conservation targets included in their 
IRPs. 


primary mechanism by which the electric utilities achieve 
the conservation targets included in their IRPs. 

The Department of Commerce conducts a biennial 
review of the CIP plan for each investor-owned utility. 
Interested parties may file comments and suggest alter¬ 
natives before the department issues a decision approv¬ 
ing or modifying the utility's plan. Utilities that meet or 
exceed the energy savings goals established by the 
Department of Commerce receive a financial bonus, 
which they are permitted to collect through a rate 
increase. Both electric utilities have exceeded their goals 
for the last several years. Table 3-5 describes how the 
Minnesota Department of Commerce addresses barriers 
to implementing energy efficiency. 


Texas 

Texas Senate Bill 7 (1999), enacted in the 1999 Texas 
legislature, mandates that at least 10 percent of an 
investor-owned electric utility's annual growth in electricity 
demand be met through energy efficiency programs 
each year. The Public Utility Commission of Texas (PUCT) 
Substantive Rule establishes procedures for meeting this 
legislative mandate, directing the transmission and distri¬ 
bution (T&D) utilities to hire third-party energy efficiency 
providers to deliver energy efficiency services to every 
customer class, using "deemed savings" estimates for 
each energy efficiency measure (PUCT, 2000). Approved 
program costs are included in the lOU's transmission and 
distribution rates, and expenditures are reported 
separately in the lOU's annual energy efficiency report to 
the PUCT Actual energy and capacity savings are verified 
by independent experts chosen by the PUCT. Incentives 
are based on prescribed avoided costs, which are set by 


To create a sustainable, aggressive national commitment to energy efficiency 


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Table 3-6. Incorporation of Energy Efficiency in Texas' Planning Processes 

Barriers 

Texas-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings 

Energy savings are based on either deemed savings or through M&V. All savings estimates are subject to verification by 
a commission-appointed M&V expert. 

Valuing energy savings 

Avoided costs shall be the estimated cost of new gas turbine, which for energy was initially set in PUCT section 25.181- 
5 to be $0.0268 /kWh saved annually at the customer's meter. 

Capacity & Resource Adequacy 

Estimating capacity savings 

Capacity savings are based on either deemed savings or through M&V. All savings estimates are subject to verification 
by a commission-appointed M&V expert. 

Valuing capacity benefits 

Avoided costs shall be the estimated cost of new gas turbine, which for capacity was initially set in PUCT section 

25.181-5 to be $78.5/kW saved annually at the customer's meter. 

Other Benefits 

Incorporating non-energy benefits 

Environmental benefits of up to 20 percent above the cost effectiveness standard can be applied for projects in an area 
that is not in attainment of ambient air quality standards. 

B. Setting Energy Efficiency Targets 

Quantity of energy efficiency to 
implement 

Senate Bill 7 (SB7) mandates that, beginning in 2004, at least 10 percent of an investor-owned electric utility's annual 
growth in electricity demand be met through energy efficiency programs each year (based on historic five-year growth 
rate for the firm). Funding for additional programs is available if deemed cost-effective. 

Estimating program effectiveness 

Each year, the utility submits to the PUCT an energy efficiency plan for the year ahead and an energy efficiency report 
for the past year. The plan must be approved by the commission, and the year-end report must include information 
regarding the energy and capacity saved. Also, independent M&V experts selected by the commission to verify the 
achieved savings as reported in each utility's report. 

Institutional difficulty in 
reallocating budget 

Funds required for achieving the energy efficiency goal are included in transmission and distribution rates, and energy 
efficiency expenditures are tracked separately from other expenditures. 

Cost expenditure timing vs. benefits 

By using a percentage of revenue set aside, utility customers directly finance the program; therefore timing of benefits is 
not critical. 

Ensuring the program costs are 
recaptured 

The annual energy efficiency report submitted by the IOU to the PUCT includes energy and capacity savings, program 
expenditures, and unspent funds. There is no verification that the estimated avoided costs are captured in utility savings. 


the PUCT. El Paso Electric Company will be included in 
the program beginning with an efficiency target of 5 per¬ 
cent of growth in 2007 and 10 percent of growth in 2008. 

The 2004 report on Texas' program accomplishments 
highlights the level of savings and success of the 
program: "In 2004, the investor-owned utilities in Texas 
achieved their statewide goals for energy efficiency once 
again. 193 MW of peak demand reduction was 
achieved, which was 36% above its goal of 142 MW. In 
addition, 448 gigawatt-hours (GWh) of demand 
eduction was achieved. These energy savings correspond 
to a reduction of 1,460,352 pounds of nitrogen oxide 
(NOx) emissions. Incentives or rebates were provided to 
project sponsors to offset the costs of a variety of ener¬ 
gy efficiency improvements. Two new energy efficiency 


programs were voluntarily introduced by the Texas utili¬ 
ties." Table 3-6 describes how Texas utilities address bar¬ 
riers to implementing energy efficiency. 

PacifiCorp 

PacifiCorp is an investor-owned utility with more than 
8,400 MW of generation capacity that serves approxi¬ 
mately 1.6 million retail customers in portions of Utah, 
Oregon, Wyoming, Washington, Idaho, and California. 
PacifiCorp primarily addresses its energy efficiency plan¬ 
ning objectives as part of its IRP process. Efficiency-based 
measures are evaluated based on their effect on the 
overall cost of PacifiCorp's preferred resource portfolio, 
defined as the overall supply portfolio with the best bal¬ 
ance of cost and risk. 


3-16 National Action Plan for Energy Efficiency 


























Additionally, some states that are in PacifiCorp's service terri¬ 
tory, such as Oregon and California, also mandate that the 
company allocate funds for efficiency under related 
statewide public goods regulations. "In Oregon, SB 1149 
requires that investor-owned electric companies collect from 
all retail customers a public purpose charge equal to 3% of 
revenues collected from customers. Of this amount, 57% 
(1.7% of revenues) goes toward Class 2 [energy efficiency- 
based] demand side management (DSM). The Energy Trust 
of Oregon (ETO) was set up to determine the manner in 
which public purpose funds will be spent"(PacifiCorp, 
2005). Using the IRP model to determine investment in ener¬ 
gy efficiency, however, PacifiCorp allocates more money to 
efficiency than required by state statute. 


As of the 2004 IRP, PacifiCorp planned to implement a 
base of 250 average megawatts (aMW) of energy 
efficiency, and to seek an additional 200 aMW of new 
efficiency programs if cost-effective options could be 
identified. PacifiCorp models the impact of energy effi¬ 
ciency as a shaped load reduction to their forecasted 
load, and computes the change in supply costs with, and 
without, the impact of DSM. This approach allows differ¬ 
ent types of DSM to receive different values based on the 
alternative supply costs in different parts of the 
PacifiCorp service territory. For example, the IRP plan 
indicates that "residential air conditioning decrements 
produce the highest value [in the East and West]. 


Table 3-7. Incorporation of Energy Efficiency in PacifiCorp's Planning Processes 


Barriers 


PacifiCorp-Administered Programs 


A. Determining the Value of Energy Efficiency 


Energy Procurement 


Estimating energy savings 

The load forecast in the IRP is reduced by the amount of energy projected to be saved by existing programs, existing 
programs that are expanded to other states, and new cost-effective programs that resulted from the 2003 DSM request 
for proposals (RFPs). These load decrements have hourly shapes based on the types of measures installed for each program. 

Valuing energy savings 

Efficiency-based (or Class 2) DSM programs are valued based on cost effectiveness from a utility cost test perspective, 
minimizing the present value revenue requirement. The IRP (using the preferred portfolio of supply-side resources) is run 
with and without these DSM decrements, and their value in terms of cost-savings is calculated as the difference in revenue 
requirements for that portfolio with and without these Class 2 load reductions. 


Capacity & Resource Adequacy 


Estimating capacity savings 

PacifiCorp explicitly evaluates the capacity value of dispatchable and price-based DSM, or 'Class 1' DSM, and the ability to 
hit target reserve margins in the system with these resources. The IRP resulted in a recommendation to defer three different 
supply-side projects. The capacity benefits of more traditional energy efficiency programs are not explicitly evaluated; 
however, the planned energy efficiency reductions are used to update the load forecast in the next year's IRP, which could 
result in additional deferrals. 

Valuing capacity benefits 

Capacity savings are valued at the forecasted costs of displaced generation projects. By integrating the evaluation of DSM 
into the overall portfolio, the value of energy efficiency is directly linked to specific generation projects. It does not appear 
that PacifiCorp evaluates the potential for avoided transmission and distribution capacity. 

Other Benefits 

Incorporating non-energy benefits 

Non-energy benefits are considered in the selection of a preferred portfolio of resources, but the non-energy benefits of 
efficiency are not explicitly used in the IRP. 

B. Setting Energy Efficiency Targets 

Quantity of energy efficiency to 
implement 

As part of the 2004 IRP, PacifiCorp determined that a base of 250 aMW of efficiency should be included in the goals for 
the next 10 years, and that an additional 200 aMW should be added if cost-effective programs could be identified. 

Estimating program effectiveness 

Measurement methodology for new projects is not explicitly identified in the IRP, but values from existing programs and 
the forecasted load shapes for PacifiCorp's customers will be used to predict benefits. 

Institutional difficulty in 
reallocating budget 

Funding is integrated into the overall process of allocating budget to resource options (both supply side and demand side), and 
faces only challenges associated with any resource option, namely proof of cost-effective benefit to the resource portfolio. 

Cost expenditure timing vs. benefits 

The IRP process for PacifiCorp seeks to gain the best balance of cost and risk using the present value of revenue require¬ 
ments, which accounts for timing issues associated with any type of resource evaluated, including efficiency. 

Ensuring the program costs are 
recaptured 

Successive IRPs will continue to evaluate the cost-effectiveness of energy efficiency programs to determine their effect on 

overall costs of the resource portfolio. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-17 


























Programs with this end use impact provide the most 
value to PacifiCorp's system because they reduce 
demand during the highest use hours of the year, sum¬ 
mer heavy load hours. The commercial lighting and sys¬ 
tem load shapes with the highest load factors provide 
the lowest avoided costs." It does not appear that 
PacifiCorp recomputes the overall risk of its portfolio 
with increased energy efficiency. Table 3-7 describes how 
PacifiCorp addresses barriers to implementing energy 
efficiency. 

Key Findings 

This section describes the common themes in the 
approaches used to navigate and overcome the barriers 
to incorporating energy efficiency in the planning 
process. While there are many approaches to solving 
each issue, the following key findings stand out: 

• Cost and Savings Data for Energy Efficiency Measures 
Are Readily Available. Given the long history of energy 
efficiency programs in several regions, existing 
resources to assist in the design and implementation of 
energy efficiency programs are widely available. Both 
California and the Northwest maintain extensive, pub¬ 
licly available online databases of energy efficiency 
measures and impacts: the Database for Energy 
Efficiency Resources (DEER) in California 6 and NWPCC 
Database in the Northwest. 7 DEER includes both elec¬ 
tricity and natural gas measures while NWPCC contains 
only electricity measures. These databases incorporate a 
number of factors affecting savings estimates, including 
climate zones, building type, building vintage, and cus¬ 
tomer usage patterns. Energy efficiency and resource 
planning studies containing detailed information on 
efficiency measures are available for regions throughout 
the United States. It is often possible to adjust existing 
data for use in a specific utility service area with relatively 
straightforward assumptions. 


• Energy Capacity and Non-Energy Benefits Can 
Justify Robust Energy Efficiency Programs. Energy 
savings alone are usually more than sufficient to justify 
and fund a wide range of efficiency measures for elec¬ 
tricity and natural gas. However, the capacity and non¬ 
energy benefits of energy efficiency are important factors 
to consider in assessing energy efficiency measures on 
an equal basis with traditional utility investments. In 
practice, policy, budget, expertise, and human 
resources are the more limiting constraints to effectively 
incorporating energy efficiency into planning. 

— Estimating the quantity and value of energy savings 
is relatively straightforward. Well-established methods 
for estimating the quantity and value of energy 
savings have been used in many regions and forums. 
All of the regional examples for estimating energy 
and capacity savings for energy efficiency evaluate 
the savings for an individual measure using either 
measurements or engineering simulation, and then 
aggregate these by the expected number of cus¬ 
tomers who will adopt the measure. Both historical 
and forward market prices are readily available, par¬ 
ticularly for natural gas where long-term forward 
markets are more developed. 

— Estimating capacity savings is more difficult, but 
challenges are being overcome. Capacity savings 
depend more heavily on regional weather conditions 
and timing of the peak loads and, therefore, are 
difficult to estimate. Results from one region do not 
readily transfer to another. Also, publicly available 
market data for capacity are not as readily available 
as for energy, even though the timing and location 
of the savings are critical. Because potential capacity 
savings are larger for electricity energy efficiency 
than natural gas, capturing capacity value is a larger 
issue for electric utilities. Production simulation can 
explicitly evaluate the change in power plant invest¬ 
ment and impact of such factors as re-dispatch due 

to transmission constraints, variation in load growth, 


6 The DEER Web site, description, and history can be found at: http://www.energy.ca.gov/deer/. The DEER database of measures can be found at: 
http://eega.cpuc.ca.gov/deer/. 

i The NWPCC Web site, comments, and efficiency measure definition can be found at: http://www.nwcouncil.org/comments/default.asp. 


3 - 18 National Action Plan for Energy Efficiency 



and other factors. But these models are analytically 
complex and planning must be tightly integrated 
with other utility planning functions to accurately 
assess savings. These challenges can and have been 
overcome in different ways in regions with a long 
track-record of energy efficiency programs (e.g., 
California, BPA, New York). 

— Estimating non-energy benefits is an emerging 
approach in many jurisdictions. Depending on the 
jurisdiction, legislation and regulatory commission 
policies might expressly permit, and even require, the 
consideration of non-energy benefits in cost-effec¬ 
tiveness determinations. However, specific guidelines 
regarding the quantification and inclusion of non¬ 
energy benefits are still under discussion or in devel¬ 
opment in most jurisdictions. The consideration of 
both non-energy and capacity benefits of energy 
efficiency programs is relatively new, compared to 
the long history of valuing energy savings. 

• A Clear Path to Funding Is Needed to Establish a 
Budget for Energy Efficiency Resources. There are 
three main approaches to funding energy efficiency 
investments: 1) utility resource planning processes, 
2) public purpose funding, and 3) a combination of 
both. In a utility resource planning process, such as the 
BPA non-construction alternatives process, efficiency 
options for meeting BPA's objectives are compared to 
potential supply-side investments on an equal basis 
when allocating the available budget. In this type of 
resource planning process, budget is allocated to effi¬ 
ciency measures from each functional area according 
to the benefits provided by efficiency programs. The 
advantage of this approach is that the budget for effi¬ 
ciency is linked directly to the savings it can achieve; 
however, particularly in the case of capacity-related 
benefits, which have critical timing and load reduction 
targets to maintain reliability, it is a difficult process. 


The public purpose funding and SBC approaches in 
New York, Minnesota, and other states are an alterna¬ 
tive to budget reallocation within the planning process. 
In California, funding from both planning processes 
and public purpose funding is used. Public purpose 
funds do not have the same direct link to energy sav¬ 
ings, so programs might not capture all the savings 
attributed to the program. Funding targets might be 
set before available efficiency options have been 
explored, so if other cost-effective efficiency measures 
are later identified, additional funding might not be 
available. This situation can result in customer costs 
being higher than they would have been if all cost- 
effective efficiency savings opportunities had been sup¬ 
ported. Using public purpose funding significantly sim¬ 
plifies the planning process, however, and puts more 
control over the amount of energy efficiency in the 
control of regulators or utility boards. As compared to 
resource planning, far less time and effort are required 
on the part of regulators or legislators to direct 
a specific amount of funding to cost-effective 
efficiency programs. 

•Integrate Energy Efficiency Early in the Resource 
Planning Process. In order to capture the full value of 
deferring the need for new investments in capacity, 
energy efficiency must be integrated early in the plan¬ 
ning process. This step will avoid sunk investment asso¬ 
ciated with longer lead-time projects. Efficiency should 
also be planned to target investments far enough into 
the future so that energy efficiency programs have the 
opportunity to ramp up and provide sufficient load 
reduction. This timeline will allow the utility to build 
expertise and establish a track record for energy effi¬ 
ciency, as well as be able to monitor peak load reduc¬ 
tions. Starting early also allows time to gain support of 
the traditional project proponents before they are vested 
in the outcome. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-19 



Recommendations and Options 

The National Action Plan for Energy Efficiency Leadership 
Group offers the following recommendations as ways to 
overcome many of the barriers to energy efficiency in 
resource planning, and provides a number of options for 
consideration for consideration by utilities, regulators and 
stakeholders (as presented in the Executive Summary). 

Recommendation: Recognize energy efficiency as a high 
priority energy resource. Energy efficiency has not been 
consistently viewed as a meaningful or dependable 
resource compared to new supply options, regardless of 
its demonstrated contributions to meeting load growth. 
Recognizing energy efficiency as a high-priority energy 
resource is an important step in efforts to capture the 
benefits it offers, and lower the overall cost of energy 
services to customers. Based on jurisdictional objectives, 
energy efficiency can be incorporated into resource plans 
to account for the long-term benefits from energy 
savings, capacity savings, potential reductions of air pol¬ 
lutants and greenhouse gases, as well as other benefits. 
The explicit integration of energy efficiency resources 
into the formalized resource planning processes that 
exist at regional, state, and utility levels can help estab¬ 
lish the rationale for energy efficiency funding levels and 
for properly valuing and balancing the benefits. In some 
jurisdictions, these existing planning processes might 
need to be adapted or even created to meaningfully 
incorporate energy efficiency resources into resource 
planning. Some states have recognized energy efficiency 
as the resource of first priority due to its broad benefits. 

Options to Consider: 

• Establishing policies to establish energy efficiency as a 
priority resource. 

• Integrating energy efficiency into utility, state, and 
regional resource planning activities. 

•Quantifying and establishing the value of energy effi¬ 
ciency, considering energy savings, capacity savings, 
and environmental benefits, as appropriate. 


Recommendation: Make a strong, long-term commitment 
to implement cost-effective energy efficiency as a 
resource. Energy efficiency programs are most success¬ 
ful and provide the greatest benefits to stakeholders 
when appropriate policies are established and main¬ 
tained over the long-term. Confidence in long-term sta¬ 
bility of the program will help maintain energy efficiency 
as a dependable resource compared to supply-side 
resources, deferring or even avoiding the need for other 
infrastructure investments, and maintain customer 
awareness and support. Some steps might include 
assessing the long-term potential for cost-effective ener¬ 
gy efficiency within a region (i.e., the energy efficiency 
that can be delivered cost-effectively through proven 
programs for each customer class within a planning hori¬ 
zon); examining the role for cutting-edge initiatives and 
technologies; establishing the cost of supply-side options 
versus energy efficiency; establishing robust M&V proce¬ 
dures; and providing for routine updates to information 
on energy efficiency potential and key costs. 

Options to Consider: 

• Establishing appropriate cost-effectiveness tests for a 
portfolio of programs to reflect the long-term benefits 
of energy efficiency. 

• Establishing the potential for long-term, cost-effective 
energy efficiency savings by customer class through 
proven programs, innovative initiatives, and cutting- 
edge technologies. 

• Establishing funding requirements for delivering long¬ 
term, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part of 
energy planning processes. 

• Developing robust M&V procedures. 

• Designating which organization(s) is responsible for 
administering the energy efficiency programs. 

• Providing for frequent updates to energy resource plans 
to accommodate new information and technology. 


3-20 National Action Plan for Energy Efficiency 




Recommendation: Broadly communicate the benefits of, 
and opportunities for, energy efficiency. Experience 
shows that energy efficiency programs help customers 
save money and contribute to lower cost energy sys¬ 
tems. But these benefits are not fully documented nor 
recognized by customers, utilities, regulators, or policy¬ 
makers. More effort is needed to establish the business 
case for energy efficiency for all decision-makers and to 
show how a well-designed approach to energy efficiency 
can benefit customers, utilities, and society by (1) reducing 
customers' bills over time, (2) fostering financially 
healthy utilities (e.g., return on equity, earnings per 
share, and debt coverage ratios unaffected), and (3) con¬ 
tributing to positive societal net benefits overall. Effort is 
also necessary to educate key stakeholders that although 
energy efficiency can be an important low-cost resource 
to integrate into the energy mix, it does require funding 
just as a new power plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the business 
case for energy efficiency at the state, utility, and other 
appropriate level addressing customer, utility, and 
societal perspectives. 

• Communicating the role of energy efficiency in lowering 
customer energy bills and system costs and risks over 
time. 


Recommendation: Provide sufficient, timely, and stable 
program funding to deliver energy efficiency where 
cost-effective. Energy efficiency programs require consis¬ 
tent and long-term funding to effectively compete with 
energy supply options. Efforts are necessary to establish 
this consistent long-term funding. A variety of mecha¬ 
nisms has been and can be used based on state, utility, 
and other stakeholder interests. It is important to ensure 
that the efficiency program providers have sufficient 
long-term funding to recover program costs and imple¬ 
ment the energy efficiency measures that have been 
demonstrated to be available and cost-effective. A number 
of states are now linking program funding to the 
achievement of energy savings. 

Options to Consider: 

• Deciding on and committing to a consistent way for 
program administrators to recover energy efficiency 
costs in a timely manner. 

• Establishing funding mechanisms for energy efficiency 
from among the available options, such as revenue 
requirements or resource procurement funding, SBCs, 
rate-basing, shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 


To create a sustainable, aggressive national commitment to energy efficiency 


3-21 




References 

American Council for an Energy Efficient Economy 
[ACEEE] (2006, February). Energy Efficiency Resource 
Standards: Experience and Recommendations. 
<http://aceee.org/pubs/eo63.htm>. 

Bokenkamp, K., LaFlash, H., Singh V. ( and Wang, D. 
(2005, July). Hedging Carbon Risk: Protecting 
Customers and Shareholders from the Financial Risk 
Associated with Carbon Dioxide Emissions. The 
Electricity Journal. 10(6): 11-24. 

California Public Utilities Commission [CPUC]. (2005, 
April 7). Interim Opinion On E3 Avoided Cost 
Methodology. Order Instituting Rulemaking to 
Promote Consistency in Methodology and Input 
Assumptions in Commission Applications of Short- 
Run and Long-run Avoided Costs, Including Pricing 
for Qualifying Facilities. Rulemaking 04-04-025 
(Filed April 22, 2004). <http://www.ethree.com/ 
CPUC/45195.pdf>. 

Frontier Associates (2005, November 1). Energy 
Efficiency Accomplishments on the Texas Investor 
Owned Utilities (Calendar Year 2004). 

McAluliffe, P. (2003, June 20). Presentation to the 
California Energy Commission. 

New York State Energy Research and Development 
Authority [NYSERDA] (2005, May). New York 
Energy $mart SM Program Cost-Effectiveness 
Assessment. Albany, New York. 


Northwest Power and Conservation Council [NWPCC] 
(2005, May). The 5th Northwest Electric Power and 
Conservation Plan, <http://www.nwcouncil.org/ 
energy/ powerplan/default.htm> 

Pacific Gas & Electric Company [PG&E] (2005, June). 
2006-2008 Energy Efficiency Program Portfolio, 
Volume I, Prepared Testimony. 

PacifiCorp. (2005, January). 2004 Integrated Resource 
Plan. <http://www.pacificorp.com/Navigation/ 
Navigation23807.html> 

Public Utilities Commission of Texas [PUCT]. (2000, 
March). Substantive Rule §25. i81. Energy Efficiency 
Goal, <http://www.puc.state.tx.us/rules/ 
subrules/electric/25.181/25.181 ,pdf> 

Texas Senate Bill 7, Section 39.905 (1999) 
<http://www.capitol.state.tx.us/ 
cgi-bin/tlo/textframe.cmd?LEG=76&SESS= 
R&CHAMBER=S&BILLTYPE=B&BILLSUFFIX= 
00007&VERSION=5&TYPE=B> 

Vermont Public Service Board (2005, July 20). Docket 
7081: Investigation into Least-Cost Integrated 
Resource Planning for Vermont Electric Power 
Company, Inc.’s Transmission System. 


3-22 National Action Plan for Energy Efficiency 







4 Business Case for 
I Energy Efficiency 



A well-designed approach to energy efficiency can benefit utilities, customers, and society by (1) fostering 
financially healthy utilities, (2) reducing customers' bills over time, and (3) contributing to positive societal 
net benefits overall. By establishing and communicating the business case for energy efficiency across utility, 
customer, and societal perspectives, cost-effective energy efficiency can be better integrated into the energy 
mix as an important low-cost resource. 

Overview 


Energy efficiency programs can save resources, lower 
utility costs, and reduce customer energy bills, but they 
also can reduce utility sales. Therefore, the effect on utility 
financial health must be carefully evaluated, and policies 
might need to be modified to keep utilities financially 
healthy (return on equity [ROE], earnings per share, debt 
coverage ratios unaffected) as they pursue efficiency. 
The extent of the potential economic and environmental 
benefits from energy efficiency, the impact on a utility's 
financial results, and the importance of modifying exist¬ 
ing policies to support greater investment in these energy 
efficiency programs depend on a number of market con¬ 
ditions that can vary from one region of the country 
to another. 

To explore the potential benefits from energy efficiency 
programs and the importance of modifying existing poli¬ 
cies, a number of business cases have been developed. 
These business cases show the impact of energy efficiency 
investments on the utility's financial health and earnings, 
customer energy bills, and social resources such as net 


Leadership Group Recommendation 
Applicable to the Business Case for 
Energy Efficiency 


• Broadly communicate the benefits of and 
opportunities for energy efficiency. 

A more detailed list of options specific to the 
objective of promoting the business case for energy 
efficiency is provided at the end of this chapter. 


Key Findings From the Eight Business 
Cases Examined 

• For both electric and gas utilities, energy efficiency 
investments consistently lower costs over time 
for both utilities and customers while providing 
positive net benefits to society. When enhanced 
by ratemaking policies to address utility financial 
barriers to energy efficiency, such as decoupling 
the utility's revenues from sales volumes, 
utility financial health can be maintained while 
comprehensive, cost-effective energy efficiency 
programs are implemented. 

• The costs of energy efficiency and reduced sales 
volume might initially raise gas or electricity bills 
due to slightly higher rates from efficiency invest¬ 
ment and reduced sales. However, as the effi¬ 
ciency gains help participating customers lower 
their energy consumption, the decreased energy 
use offsets higher rates to drive their total energy 
bills down. In the eight cases examined, average 
customer bills were reduced by 2 percent to 
9 percent over a ten year period, compared to the 
no-efficiency scenario. 

• Investment in cost-effective energy efficiency 
programs yield a net benefit to society—on the 
order of hundreds of millions of dollars in net 
present value (NPV) for the illustrative case studies 
(small- to medium-sized utilities). 


To create a sustainable, aggressive national commitment to energy efficiency 


4-1 












efficiency costs and pollutant emissions. The business 
cases were developed using an Energy Efficiency Benefits 
Calculator (Calculator) that facilitates evaluation of the 
financial impact of energy efficiency on its major stake¬ 
holders—utilities, customers, and society. The Calculator 
allows users to examine efficiency investment scenarios 
across different types of utilities using transparent input 
assumptions (see Appendix B for detailed inputs and 
results). 1 Policies evaluated with the Calculator are 
discussed in more detail in Chapter 2: Utility Ratemaking 
& Revenue Requirements and Chapter 3: Energy 
Resource Planning Processes. 

Eight business cases are presented to illustrate the 
impact of comprehensive energy efficiency programs on 
utilities, their customers, and society. The eight cases 
represent a range of utility types under different growth 
and investment situations. Each case compares the 
consequences of three scenarios—no energy efficiency 
programs without a decoupling mechanism, energy effi¬ 
ciency without decoupling, and energy efficiency with 
decoupling. Energy efficiency spending was assumed to 
be equal to 2 percent of electricity revenue and 0.5 per¬ 
cent of natural gas revenue across cases, regardless of 
the decoupling assumption; these assumptions are similar 
to many of the programs being managed in regions of 
the country today. 2 3 In practice, decoupling and share¬ 
holder incentives often lead to increased energy efficiency 
investments by utilities, increasing customer and 
societal benefits. 


Business Cases Evaluated 

Cases 1 and 2: Investor-Owned Electric and 
Natural Gas Utilities 

• Case 1: Low-Growth 

• Case 2: High-Growth 

Cases 3 and 4: Electric Power Plant Deferral 

• Case 3: Low-Growth 

• Case 4; High-Growth 

Cases 5 and 6: Investor-Owned Electric 
Utility Structure 

• Case 5: Vertically Integrated Utility 

• Case 6: Restructured Delivery-Only Utility 

Cases 7 and 8: Publicly and Cooperatively 
Owned Electric Utilities 

• Case 7; Minimum Debt Coverage Ratio 

• Case 8: Minimum Cash Position 

Table 4-1 provides a summary of main assump¬ 
tions and results of the business cases. 


Table 4-1 summarizes assumptions about the utility size, 
energy efficiency program, and each business case. All 
values shown compare the savings with and without 
energy efficiency over a 15-year horizon. The present 
value calculations are computed over 30 years, to 
account for the lifetime of the energy efficiency invest¬ 
ments over 15 years. 


1 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring 
detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost-effectiveness testing, energy 
efficiency resource planning, and consumer behavior analysis. 

2 See Chapter 6: Energy Efficiency Program Best Practices for more information on existing programs. 

3 Cumulative and NPV business case results are calculated using a 5 percent discount rate over 30 years to include the project life term for energy effi¬ 
ciency investments of 15 years. All values are in nominal dollars with NPV reported in 2007 dollars (year 1 = 2007). Consistent rates are assumed in year 
0 and then adjusted by the Calculator for case-specific assumptions. Reductions in utility revenue requirement do not change with decoupling in the 
Calculator, but might in practice if decoupling motivates the utility to deliver additional energy efficiency. In these cases, societal benefits conservative¬ 
ly equals only the savings from reduced wholesale electricity purchases and capital expenditures minus utility and participant costs of energy efficiency. 
Energy efficiency program costs given in $/megawatt-hour (MWh) for electric utilities and $/million British thermal units (MMBtu) 
for gas utilities. 


4-2 National Action Plan for Energy Efficiency 




. Summary of Main Assumptions and Results for Each Business Case Analyzed 3 


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To create a sustainable, aggressive national commitment to energy efficiency 


4-3 


BcF = billion cubic feet; CO 2 = carbon dioxide; EE = energy efficiency; GWh = gigawatt-hour; kWh = kilowatt-hour; $MM = million dollars; MMBtu = million British thermal units; MW = megawatt; 
MWh = megawatt-hour; N/A = not applicable; N0 X = nitrous oxides; NPV = net present value. 

























While these eight business cases are not comprehensive, 
they allow some generalizations about the likely financial 
implications of energy efficiency investments. These gen¬ 
eralizations depend upon the three different perspec¬ 
tives analyzed: 

• Utility Perspective. The financial health of the utility is 
modestly impacted because the introduction of energy 
efficiency reduces sales. If energy efficiency is accom¬ 
panied with mechanisms to protect shareholders— 
such as a decoupling mechanism to buffer revenues 
and profits from sales volumes—the utility's financial 
situation can remain neutral to the efficiency invest¬ 
ments. 4 This effect holds true for both public and investor- 
owned utilities. 

• Customer Perspective. Access to energy efficiency 
drives customer bills down over time. Across the eight 
case studies, energy bills are reduced by 2 percent to 9 
percent over a 10 to 15-year period. Even though the 
efficiency investment and decreased sales drives rates 
slightly higher, this increase is more than offset in 
average customer bills due to a reduction in energy usage. 

•Societal Perspective. The monetary benefits from energy 
efficiency exceed costs and are supplemented by other 
benefits such as lower air emissions. 

Generalizations may also be made about the impact of 
policies to remove the throughput incentive, such as 
decoupling mechanisms, across these business cases. 5 
These generalizations include: 

• Utility Perspective. Policies that remove the throughput 
incentive can provide utilities with financial protection 
from changes in throughput due to energy efficiency, 
by smoothing the utility's financial performance while 


lowering customer bills. Generally, the business case 
results show that a decoupling mechanism benefits 
utilities more if the energy savings from efficiency are a 
greater percent of load growth. Also, because small 
reductions in throughput have a greater effect on the 
financial condition of distribution utilities, decoupling 
generally benefits distribution utilities more than verti¬ 
cally integrated utilities. A utility's actual results will 
depend on the structure of its efficiency program, as 
well as the specific decoupling and attrition mechanisms. 

• Customer Perspective. Decoupling generates more fre¬ 
quent, but smaller, rate adjustments over time because 
variations in throughput require periodic rate "true- 
ups." Decoupling leads to modestly higher rates earlier 
for customers, when efficiency account for a high per¬ 
cent of load growth. In all cases, energy efficiency 
reduces average customer bills over time, with and 
without decoupling. 

•Societal Perspective. The societal benefits of energy 
efficiency are tied to the amount of energy efficiency 
implemented. Therefore, to the extent that decoupling 
encourages investment in energy efficiency, it is a positive 
from a societal perspective. Decoupling itself does not 
change the societal benefits of energy efficiency. 

While these cases are a good starting point, each utility 
will have some unique characteristics, such as differences 
in fuel and other costs, growth rates, regulatory struc¬ 
ture, and required capital expenditures. These and other 
inputs can be customized in the Calculator so users can 
consider the possible impacts of energy efficiency on 
their unique situations. The Calculator was developed to 
aid users in promoting the adoption of energy efficiency 
programs, and the results are therefore geared for 
education and outreach purposes. 6 


4 Though not modeled in these business case scenarios, incentive mechanisms can also be used to let shareholders profit from achieving efficiency goals, 
further protecting shareholders. Such incentives can increase the utility and shareholder motivations for increased energy efficiency investment. 

s The decoupling mechanism assumed by the Calculator is a "generic" balancing account that adjusts rates annually to account for reduced sales 
volumes, thereby maintaining revenue at target projections. Differences in utility incentives that alternative decoupling mechanisms provide are discussed 
in Chapter 2: Utility Ratemaking & Revenue Requirements, but are not modeled. The decoupling mechanism does not protect the utility from 
cost variations. 

6 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring 
detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost effectiveness testing, energy effi¬ 
ciency resource planning, and consumer behavior analysis. 


4-4 National Action Plan for Energy Efficiency 



Business Case Results 


The eight cases evaluated were designed to isolate the impact 
of energy efficiency investments and decoupling mechanisms 
in different utility contexts (e.g., low-growth and high-growth 
utilities, vertically integrated and restructured utility, or cash- 
only and debt-financed publicly and cooperatively owned 
utilities). For each case, three energy efficiency scenarios are 
evaluated (no efficiency without decoupling, efficiency with¬ 
out decoupling, and efficiency with decoupling), while hold¬ 
ing all other utility conditions and assumptions constant. The 
eight scenarios are divided into four sets of two cases each 
with contrasting assumptions. 

An explanation of the key results of the business cases is 
provided below, with further details provided for each 
case in Appendix B. 

Cases 1 and 2: Low-Growth and High-Growth 
Utilities 

In this first comparison, the results of implementing 
energy efficiency on two investor-owned electric and 
natural gas distribution utilities are contrasted. These 
utilities are spending the same percent of revenue on 
energy efficiency and vary only by load growth. The low- 
growth electric utility (Case 1) has a 1 percent sales 
growth rate and the low-growth gas utility has a 0 per¬ 
cent sales growth rate, while the high-growth electric 
utility (Case 2) has a 5 percent sales growth rate and the 
high-growth gas utility has a 2 percent sales growth rate. 
Table 4-2 compares the results for electric utilities, and 
Table 4-3 compares the results for the natural gas utili¬ 
ties. In both cases (and all other cases examined), the 
Calculator assumes a 'current year' test year for rate¬ 
setting. When rate adjustments are needed, the rates are 
set based on the costs and sales in that same year. 
Therefore, differences between forecasted and actual 
growth rates do not affect the results. 

Both electric and natural gas utilities show similar trends. 
With low load growth, the same level of energy efficiency 
investment offsets a high percentage of load growth, and 


utility return on equity (ROE) falls below target until the next 
rate case unless decoupling is in place. 7 In contrast, the 
high-growth utility has an ROE that exceeds the target rate 
of return until the rates are decreased to account for the 
increasing sales. In both cases, energy efficiency reduces the 
utility return from what it would have been absent energy 
efficiency. Generally speaking, energy efficiency investments 
that account for a higher percentage of load growth expose 
an electric or natural gas utility to a greater negative finan¬ 
cial effect unless decoupling is in place. 

These cases also look at the difference between the two 
utilities with and without a decoupling mechanism. Both 
utilities earn their target ROE in rate case years, with and 
without the energy efficiency in place. (Note that in prac¬ 
tice, decoupling does not guarantee achieving the target 
ROE.) For the low-growth utility, the decoupling mecha¬ 
nism drives a rate adjustment to reach the target ROE, 
and the utility has higher ROE than without decoupling 
(Case 1). In the high-growth case, decoupling decreases 
ROE relative to the case without decoupling (Case 2), 
and prevents the utility from earning slightly above its 
target ROE from increased sales in between rate cases, 
allowing customer rates to decline sooner in the high- 
growth electric case if decoupling is in place. 

In both electric and natural gas Case 1 and Case 2, 
average customer bills decline over time. The average bill 
is lower beginning in year 3 in the electric utility with no 
decoupling comparison, and in year 5 with decoupling. 
A similar pattern is found for the gas utility example. 
Average bills decrease more when the efficiency is a 
higher percent of load growth, even though rates 
slightly increase due to efficiency investments and 
reduced sales. The average customer bill declines more 
smoothly when a decoupling mechanism is used due to 
more frequent rate adjustments. 

For both electricity and natural gas energy efficiency, the net 
societal benefit is computed as the difference of the total 
benefits of energy efficiency, less the total costs. From a soci¬ 
etal perspective, the benefits include the value of reduced 
expenditure on energy (including market price reductions— 


7 In Cases 1 and 2, the electric utility invests 2 percent of revenue in energy efficiency and the gas utility invests 0.5 percent of revenue. 
To create a sustainable, aggressive national commitment to energy efficiency 


4-5 





Table 4-2. High- and Low-Growth Results: Electric Utility 


Case 1: Low-Growth (1%) 

Return on Equity (ROE) 

Without efficiency and decoupling, the low sales drive 
ROE below the target return. Target ROE is achieved 
with energy efficiency (EE) and decoupling. Increasing 
energy efficiency without decoupling decreases ROE. 


Case 2: High-Growth (5%) 

Return on Equity (ROE) 

With high load growth, without decoupling, the utili¬ 
ty achieves greater than the target ROE until rates are 
adjusted. With energy efficiency, sales and earnings 
are reduced, reducing ROE. 


Investor-Owned Utility Comparison of Return on Equity 

Case 1 



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5 6 

Year 


10 


ROE% - No EE 


ROE% - EE no Decoupling 


ROE% - EE and Decoupling 


Target ROE% 


Case 1: Low-Growth (1%) 

Rates 

Without energy efficiency, the utility sells higher 
volumes than in the no efficiency scenarios and has 
slightly lower rates. Rates in the energy efficiency 
scenario increase primarily due to lower throughput; 
rates are slightly higher in the decoupling scenario due to 
increase earnings to the target ROE. 


Case 2: High-Growth (5%) 

Rates 

In the high-growth case, rates are relatively flat. 
Without energy efficiency, the utility sells higher 
volumes and has slightly lower rates. Decoupling does 
not have a great impact in this case because the ROE 
is near target levels without any rate adjustments. 


Comparison of Average Rate 

Case 1 



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- - - Utility Average Rate - No EE — Utility Average Rate - EE no Decoupling —— Utility Average Rate - EE and Decoupling 




4-6 National Action Plan for Energy Efficiency 








































if any), reduced losses, reduced capital expenditures, and 
reduced air emissions (if emissions are monetized). 8 The 
costs include both utility program and administration costs 
as well as the participant costs of energy efficiency. If the net 


societal benefits are positive, the energy efficiency is cost- 
effective from a societal perspective. In both Case 1 and 
Case 2 (and all other cases evaluated using the tool), the net 
societal benefits are positive for investments in energy 


Table 4-2. High- and Low-Growth Results: Electric Utility (continued) 


Case 1: Low-Growth (1%) 

— 

Total customer bills with energy efficiency programs 
decline over time, indicating customer savings resulting 
from lower energy consumption. Rate increases 
through the decoupling mechanism reduce the pace 
of bill savings in the decoupling case. 


Case 2: High-Growth (5%) 

Bills 

Total customer bills with energy efficiency decline over 
time, indicating customer savings resulting from lower 
energy consumption. There is little difference between 
the decoupling and no decoupling cases in the high- 
growth scenario. 


Percent Change in Customer Bills 



Change in Customer Bills (%) - EE no Decoupling —— Change in Customer Bills (%) - EE and Decoupling 


Case 1: Low-Growth (1%) Case 2: High-Growth (5%) 

Net Societal Benefits Net Societal Benefits 

Over time, the savings from energy efficiency exceed Over time, the savings from energy efficiency exceed 
the annual costs. The societal cost and societal savings the annual costs. The societal cost and societal savings 
are the same, with and without decoupling. are the same, with and without decoupling. 


Delivered Costs and Benefits of EE 



Societal Cost ($/MWh saved) —— Societal Savings ($/MWh saved) 


8 The cases discussed in this document include conservative assumptions and do not include market price reductions or monetize air emissions in net 
societal benefits. 


To create a sustainable, aggressive national commitment to energy efficiency 


4-7 






















































efficiency. In the low-growth case, the savings exceed costs 
within two years for both the electric and natural case cases. 
In the high-growth case, the savings exceed costs within five 


years for the electric utility cases and four years for the nat¬ 
ural gas utility cases. Energy efficiency has a similar effect 
upon natural gas utilities, as shown in Table 4-3. 


Table 4-3. High- and Low-Growth Results: Natural Gas Utility 


Case 1: Low-Growth (0%) 

Return on Equity (ROE) 

Without efficiency and decoupling, the low sales 
result in ROE falling below the target return. Similarly, 
energy efficiency without decoupling drops utility 
return below target ROE. Target ROE is achieved with 
decoupling. 


Case 2: High-Growth (2%) 

Return on Equity (ROE) 

With high load growth, energy efficiency has less 
impact on total sales and earnings. Thus, the utility 
achieves close to its target ROE in the early years, 
although without decoupling, ROE falls slightly in later 
years as energy efficiency reduces sales over time. 


Investor-Owned Utility Comparison of Return on Equity 

Case 1 



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ROE% - EE and Decoupling 


Target ROE% 


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Rates 

Rates increase over time because of increasing rate base 
and low sales growth. Without energy efficiency, the util¬ 
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increases rates when sales volumes are below target. 
Comparison of Average Rate 



Case 2: High-Growth (2%) 

Rates 

Without energy efficiency, the utility sells higher volumes 
and has lower rates. Energy efficiency increases rates 
slightly in later years by reducing sales volumes. 



1 2 3 4 5 6 7 8 9 10 

Year 


~ “ Utility Average Rate - No EE 

— Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 



4-8 National Action Plan for Energy Efficiency 










































Table 4-3. High- and Low-Growth Results: Natural Gas Utility (continued) 


Case 1: Low-Growth (0%) 

Customer Bills 

Total customer bills with energy efficiency decline over 
time, indicating customer savings resulting from lower 
energy consumption. Customer utility bills initially 
increase slightly with decoupling as rates are increased to 
hold ROE at the target level and spending increases 
on efficiency. 


Case 2: High-Growth (2%) 

Customer Bills 

Customer utility bills with energy efficiency reflect the 
more limited impact of efficiency programs on rate pro¬ 
file. Total customer bills decline over time, indicating cus¬ 
tomer savings resulting from lower energy consumption. 


Percent Change in Customer Bills 



Change in Customer Bills (%) - EE no Decoupling —- Change in Customer Bills (%) - EE and Decoupling 


Case 1: Low-Growth (0%) 

Net Societal Benefits 

Over time, the savings from energy efficiency exceed 
the annual costs. The societal cost and societal savings 
are the same, with and without decoupling. 


Case 2: High-Growth (2%) 

Net Societal Benefits 

Over time, the savings from energy efficiency exceed 
the annual costs. The societal cost and societal savings 
are the same, with and without decoupling. 


Delivered Costs and Benefits of EE 

Case 1 




' Societal Cost ($/therm saved) 


Societal Savings ($/therm saved) 


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Cases 3 and 4: Electric Power Plant Deferral 

This case study examines an electric investor-owned utility 
with a large capital project (modeled here as a 500-MW 
combined-cycle power plant, although the conclusions 
are similar for other large capital projects), planned for 
construction in 2009. 9 Again the effect of a 1 percent 
growth rate (Case 3) is compared with a 5 percent 
growth rate (Case 4) with identical energy efficiency 
investments of 2 percent of electric utility revenues. 

Figure 4-1 shows the capital expenditure for the project 
with and without an aggressive energy efficiency plan 
and a summary of the net benefits from each perspec¬ 
tive. The length of investment deferral is based on the 
percent of peak load reduced due to energy efficiency 


investments. The vertical axis shows how the expendi¬ 
ture in nominal dollars starts at $500 million in 2009, or 
slightly higher (due to inflation) after deferral. With Case 
3, energy efficiency investments account for a higher 
percentage of peak load growth, and can defer the proj¬ 
ect until 2013. With higher growth and the same level of 
efficiency savings (Case 4), the same efficiency invest¬ 
ment only defers the project until 2010. 

In Case 3, the energy efficiency program causes a 
greater reduction in revenue requirement—a 30-year 
reduction of $476 million rather than a Case 4 reduction 
of $338 million—providing benefits from a customer 
perspective. From a societal perspective, the low-growth 
case energy efficiency program yields higher net societal 
benefit as well: $332 million versus $269 million. 


Figure 4-1. Comparison of Deferral Length with Low- and High-Growth 


Case 3: Low-Growth Investment Timing 


Comparison of Investment Timing - Electric Utility 


T7T 600 
c 
Q 

1 500 

c 400 

E 

o 

S 300 

<u 

1 200 
c 

CD 

g- 100 

LU 

~ru 

• 5 . 0 
ID 

u 


Case 3 


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Year 


Case 4: High-Growth Investment Timing 


c 

o 


ID 

c 

E 

o 


■o 

c 

QJ 

Q_ 

X 


Q_ 

ID 

U 



2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Year 


■ Without Energy Efficiency 


□ With Energy Efficiency 


30-year savings impact from EE Low-Growth Utility High-Growth Utility 

Decrease in Revenue Requirement (net present value [NPV], million dollars [$MM]) $476 $338 

Net Customer Savings - decoupling (NPV, $MM) $319 $275 

Net Societal Benefit (NPV, $MM) $332 $269 


9 This illustration demonstrates how energy efficiency can be used, including efforts to reduce peak capacity requirements, to defer a single 500 MW 
combined cycle power plant. Energy efficiency can also be used to defer other, smaller investments. 


4-10 National Action Plan for Energy Efficiency 























































Table 4-4 compares the reduction in revenue requirement 
due to the deferral of the power plant investment between 
the two cases. In Case 3, the reduction in revenue require¬ 
ment due to the deferral to 2013 results in present value 
savings of $36 million over the three years that the plant 
was deferred. In Case 4, the deferral provides present value 
savings of $11 million for the one-year deferral. 

Although the project is deferred longer in the low- 
growth case, fewer sales overall and higher installed cap¬ 
ital costs result in higher rates over time relative to the 


high-growth case. In both cases, the increase in rates 
from energy efficiency programs, starting in year 1, is 
significantly less than the rate increase that occurs after 
the new power plant investment is made, leading to 
lower customer bills. Customer bill savings are greatest 
during the years that the plant is deferred. 10 

Cases 5 and 6: Vertically Integrated Utility vs. 
Restructured Delivery Company 

In this example, a vertically integrated electric utility 
(Case 5) is compared with the restructured electric delivery 


Table 4-4. Power Plant Deferral Results 


Case 3: Low-Growth (1%) 

Revenue Requirement 

2009 project deferred to 2013, resulting in a reduc¬ 
tion in revenue requirement due to deferring the 
power plant over three years of PV$36 million. 

Other Capital Expenditures 

The low-growth case leads to the savings of other cap¬ 
ital expenditures compared to the high-growth case. 

Retail Rates 

With low load growth, a given amount of energy 
efficiency defers so much load growth that the 
new power plant can be deferred for three 
years, allowing the utility to conserve capital and post¬ 
pone rate increases for several years. 


Case 4: High-Growth (5%) 

Revenue Requirement 

2009 project deferred to 2010, resulting in a reduc¬ 
tion in revenue requirement from deferring the power 
plant over a year of PV$11 million. 

Other Capital Expenditures 

The low-growth case leads to the savings of other cap¬ 
ital expenditures compared to the high-growth case. 

Retail Rates 

With high load growth, energy efficiency reduces load 
growth enough to defer the new power plant invest¬ 
ment by one year, slowing implementation of a rela¬ 
tively smaller rate increase. 


Comparison of Average Rate 

Case 3 



QJ 

4-> 

<T3 

CC 

CD 

CT1 

ft) 

i_ 

CL) 

> 

< 


$0.30 

$0.25 

$ 0.20 

$0.15 

$ 0.10 


Case 4 




n-r 

2 3 


i -r 


5 6 
Year 


10 


Utility Average Rate - No EE 


Utility Average Rate - EE no Decoupling 


Utility Average Rate - EE and Decoupling 


io The Calculator assumes that a rate case occurs in the year following a large capital investment. When a decoupling mechanism is used, a higher rate 
adjustment (and immediate decrease in bill savings) occurs once a new major infrastructure investment is brought online. This charge is due to the new 
level of capital expenditures at the same time a positive decoupling rate adjustment is making up for previous deficiencies. 


To create a sustainable, aggressive national commitment to energy efficiency 


4-11 - 
































company (Case 6); both experiencing a 2 percent growth 
rate and investing 2 percent of revenue in energy effi¬ 
ciency. These cases assume that the vertically integrated 
utility has more capital assets and larger annual capital 


expenditures than a restructured delivery utility. 
In general, the financial impact of energy efficiency on 
delivery utilities is more pronounced than on vertically 
integrated utilities with the same number of customers and 


Table 4-4. Power Plant Deferral Results (continued) 


Case 3: Low-Growth (1%) 


Customer Bills 

Although rates rise with large capital expenditures, bills 
continue to fall over time as energy efficiency drives 
customer volume down to offset the higher rates. 


Case 4: High-Growth (5%) 


Customer Bills 

Although rates rise with large capital expenditures, bills 
continue to fall over time as energy efficiency drives 
customer volume down to offset the higher rates. 


Percent Change in Customer Bills 

Case 3 



Case 4 





Change in Customer Bills (%) - EE no Decoupling 


Change in Customer Bills (%) - EE and Decoupling 


Case 3: Low-Growth (1%) 


Load Impact 

Energy efficiency significantly reduces load growth 
and reduces the need for new capital investment. 


Case 4: High-Growth (5%) 


Load Impact 

With high growth, energy efficiency has a limited 
impact on peak load, and defers a modest amount of 
new capital investment. 


Comparison of Peak Load Growth 

Case 3 


>- 

on 

i— 

i_i_ 

O 

•vP 


“O 

CD 

o 


no 

<D 

Q_ 


160% 

150% 

140% 

130% 

120 % 

110 % 

100 % 

90% 


10 


Year 


Case 4 



Forecasted Growth - EE and Decoupling 


Forecasted Growth - No EE 


4-12 National Action Plan for Energy Efficiency 
































































sales. Once divested of a generation plant, the 
distribution utility is a smaller company (in terms of total 
rate base and capitalization), and fluctuations in through¬ 
put and earnings have a relatively larger impact on return. 


Table 4-5 summarizes the comparison of ROE, rates, bills 
and societal benefits. Without implementing energy effi¬ 
ciency, both utilities are relatively financially healthy, 
achieving near their target rate of return in each year; 


Table 4-5. Vertically Integrated and Delivery Company Results 


Case 5: Vertically Integrated 


Return on Equity (ROE) 

Because the vertically integrated utility has a large rate 
base, the impact of energy efficiency upon total earnings 
is limited and it has little impact upon ROE (with or with¬ 
out decoupling). 


Case 6: Delivery Utility 


Return on Equity (ROE) 

With a smaller rate base and revenues only from kWh 
deliveries, energy efficiency has a larger impact on a 
ROE without decoupling than a vertically integrated utility. 


Investor-Owned Utility Comparison of Return on Equity 

Case 5 





15% 


vP 

12% 

LU 

o 

cc 

X 

9% 

CD 

1— 

cd 

-i-j 

6% 

< 

3% 


5 6 
Year 


10 



15% 

^ v 

vP 

cy' 

12% 

LU 

o 

cc 

X 

9% 

CD 

I— 

i_ 

CD 

+-' 

6% 

< 

3% 


Case 6 


T 

4 


t -r 

5 6 

Year 


10 


ROE% - No EE 


ROE% - EE no Decoupling 


ROE% - EE and Decoupling 


Target ROE% 


Case 5: Vertically Integrated 


Rates 

Without energy efficiency, the utility sells higher 
volumes and has lower rates. Total retail rates, including 
delivery and energy, are similar for the vertically 
integrated and restructured utilities. 


Comparison of Average Rate 

Case 5 


CD 

ro 

cc 

CD 

CT1 

CD 

L. 

CD 

> 

< 


$0.30 

$0.25 

$ 0.20 

$0.15 

$ 0.10 


1 


5 6 
Year 


10 


Case 6: Delivery Utility 


Rates 

Without energy efficiency, the utility sells higher 
volumes and has lower rates. Total retail rates, 
including delivery and energy, are similar for the 
vertically integrated and restructured utilities. 


CD 

+- 1 

CD 

CC 

CD 

cn 

CD 

cd 

> 

< 


$0.30 


$0.25 


$ 0.20 


$0.15 


$ 0.10 


Case 6 


5 6 
Year 


10 


1 Utility Average Rate - No EE 


Utility Average Rate - EE no Decoupling 


1 Utility Average Rate - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


4-13 










































Table 4-5. Vertically Integrated and Delivery Company Results (continued) 


Case 5: Vertically Integrated 

_ 

Total customer bills with energy efficiency programs 
decline over time, indicating average customer savings 
resulting from lower energy consumption. Customer 
utility bills decrease more smoothly with decoupling 
as a result of the more frequent rate adjustments. 

Percent Change in Customer Bills 


Case 5 



Case 6: Delivery Utility_ 

Bills 

Total customer bills with energy efficiency programs 
decline over time, indicating average customer savings 
resulting from lower energy consumption. Customer util¬ 
ity bills decrease more slowly in the decoupling case, 
because rates are increased earlier to offset reduced sales. 


Case 6 



Change in Customer Bills (%) - EE no Decoupling — ■ ■ - Change in Customer Bills (%) - EE and Decoupling 


Case 6: Delivery Utility 
Net Societal Benefits 

As with the vertically integrated utility, savings from 
energy efficiency exceed the costs over time. The 
distribution utility has a lower initial societal savings 
because the distribution company reduces fewer 
capital expenditures at the outset of the energy 
efficiency investments. Over time, the societal costs 
and savings are similar to the distribution company. 


Delivered Costs and Benefits of EE 




Year Year 


Societal Cost ($/MWh saved) —— Societal Savings ($/MWh saved) 




Case 5: Vertically Integrated 
Net Societal Benefits 

Over time, the savings from energy efficiency exceed 
the annual costs. The societal cost and societal savings 
are the same, with and without decoupling. 






4-14 National Action Plan for Energy Efficiency 
























































however, introducing energy efficiency reduces ROE and 
earnings for both utilities unless a decoupling mecha¬ 
nism is put in place. Customer rates increases, bill 
savings, and societal benefits follow similar trends with 
energy efficiency, as discussed in Cases 1 and 2. 

Cases 7 and 8: Publicly and Cooperatively 
Owned Electric Utilities 

The first six cases used an investor-owned electric utility 
to illustrate the business case for energy efficiency. The 
Calculator also can evaluate the impact of efficiency 
programs on publicly and cooperatively owned electric 
utilities. Many of the issues related to the impact of 
growth rates and capital deferral discussed in the 
investor-owned utility examples apply equally to publicly 
and cooperatively owned utilities. From a net societal 
benefit perspective, the results are identical for publicly, 
cooperatively, and privately owned utilities. The ratemaking 
and utility financing perspectives are different, however. 


The financial position of publicly owned utilities is evalu¬ 
ated primarily based on either the debt coverage ratio 
(which is critical to maintaining a high bond rating and 
low cost capital) or the minimum cash position (for 
utilities with no debt). Table 4-6 shows the results of a 
publicly or cooperatively owned utility with an energy 
efficiency program of 2 percent of revenue and load 
growth of 2 percent. In both cases, the assumption is 
made that the utility adjusts rates whenever the debt 
coverage ratio or minimum cash position falls below a 
threshold. This assumption makes comparisons of differ¬ 
ent cases more difficult, but the trends are similar to the 
investor-owned utilities on a regular rate case cycle. The 
change in utility financial health due to energy efficiency 
is relatively modest because of the ability to adjust the 
retail rates to maintain financial health. The publicly and 
cooperatively owned utilities will experience similar 
financial health problems as investor-owned utilities if they 
do not adjust rates. 


Table 4-6. Publicly and Cooperatively Owned Utility Results 


Case 7: Minimum Debt Coverage Ratio 
Utility Financial Health 

A decoupling mechanism stabilizes the utility's ability 
to cover debt by adjusting rates for variations in 
throughput. Without decoupling, rates are adjusted 
whenever the debt coverage rate falls below a threshold 
(ratio 2 in the example). The rate adjustment is 
required earlier in the energy efficiency scenario. 

Public Power/Cooperative Debt Coverage Ratio 


Case 7 



- - - • Debt Coverage Ratio - No EE 

. . Debt Coverage Ratio - EE no Decoupling 

———^ Debt Coverage Ratio - EE and Decoupling 


Case 8: Minimum Cash Position 
Utility Financial Health 

In the no decoupling cases (with and without energy 
efficiency), rates are reset if the cash position falls 
below a minimum threshold ($70 million in this 
example). With decoupling, the utility adjusts rates to 
hit the target cash level in each year. The results are 
similar as long as there is an ability to reset rates when 
needed to maintain a minimum cash position. 

Cash Position at End of Year 


Case 8 



■ Cash Position - No EE 

■ Cash Position - EE no Decoupling 
“ Cash Position - EE and Decoupling 


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Table 4-6. Publicly and Cooperatively Owned Utility Results (continued) 


Case 7: Minimum Debt Coverage Ratio 
Customer Rates 

With or without decoupling, rates are adjusted to 
maintain financial health. Rates are lowest without 
energy efficiency and highest with energy efficiency 
and decoupling. 


Case 8: Minimum Cash Position_ 

Customer Rates 

Once energy efficiency is implemented, retail rate levels 
are similar, with or without decoupling in place. The 
decoupling case is slightly smoother with smaller, 
more frequent rate adjustments. 


Comparison of Average Rate 

Case 7 



Case 8 



Utility Average Rate - No EE 


Utility Average Rate - EE no Decoupling 


Utility Average Rate - EE and Decoupling 


Case 7: Minimum Debt Coverage Ratio 
Customer Bills 

Average customer bills decline with energy efficiency 
investments, with and without decoupling. The 
'randomness' in the bill change is due to different tim¬ 
ing of rate adjustments in the energy efficiency and 
no energy efficiency cases. However, overall the trend 
is downward. 


Case 8: Minimum Cash Position 
Customer Bills 

Average customer bills decline with energy efficiency 
investments in both the decoupling and no decoupling 
cases. 


Percent Change in Customer Bills 


Case 7 



Year 


Case 8 



Change in Customer Bills (%) - EE no Decoupling . Change in Customer Bills (%) - EE and Decoupling 


4-16 National Action Plan for Energy Efficiency 










































Key Findings 


This chapter summarizes eight business cases for energy 
efficiency resulting from the Energy Efficiency Benefits 
Calculator. This Calculator provides simplified results 
from a utility, customer, and societal perspective. As stated 
on page 4-1, the key findings from the eight cases 
examined include: 

• For both electric and gas utilities, energy efficiency 
investments consistently lower costs over time for both 
utilities and customers, while providing positive 
net benefits to society. When enhanced by ratemaking 
policies to address utility financial barriers to 
energy efficiency, such as decoupling the utility's 
revenues from sales volumes, utility financial health can 
be maintained while comprehensive, cost-effective 
energy efficiency programs are implemented. 

•The costs of energy efficiency and reduced sales 
volume might initially raise gas or electricity bills due to 
slightly higher rates from efficiency investment and 
reduced sales. However, as the efficiency gains help 
participating customers lower their energy consump¬ 
tion, the decreased energy use offsets higher rates to 
drive their total energy bills down. In the 8 cases exam¬ 
ined, average customer bills were reduced by 2 percent 
to 9 percent over a ten year period, compared to the 
no-efficiency scenario. 

• Investment in cost-effective energy efficiency programs 
yields a net benefit to society—on the order of 
hundreds of millions of dollars in NPV for the illustrative 
case studies (small- to medium-sized utilities). 


Recommendations and Options 

The National Action Plan for Energy Efficiency Leadership 
Group offers the following recommendation as a way to 
overcome many of the barriers to energy efficiency, and 
provides the following options for consideration by utili¬ 
ties, regulators, and stakeholders (as presented in the 
Executive Summary). 

Recommendation: Broadly communicate the bene¬ 
fits of, and opportunities for, energy efficiency. 

Experience shows that energy efficiency programs help 
customers save money and contribute to lower cost 
energy systems. But these impacts are not fully docu¬ 
mented nor recognized by customers, utilities, regulators 
and policy-makers. More effort is needed to establish the 
business case for energy efficiency for all decision-makers 
and to show how a well-designed approach to energy 
efficiency can benefit customers, utilities, and society by 
(1) reducing customers bills over time, (2) fostering 
financially healthy utilities (return on equity [ROE], earn¬ 
ings per share, debt coverage ratios unaffected), and (3) 
contributing to positive societal net benefits overall. 
Effort is also necessary to educate key stakeholders that, 
although energy efficiency can be an important low-cost 
resource to integrate into the energy mix, it does require 
funding, just as a new power plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the busi¬ 
ness case for energy efficiency at the state, utility, and 
other appropriate level addressing relevant customer, 
utility, and societal perspectives. 

• Communicating the role of energy efficiency in lowering 
customer energy bills and system costs and risks 
over time. 


Reference 


National Action Plan for Energy Efficiency. (2006). 
Energy Efficiency Benefits Calculator. 
<http://www.epa.gov/cleanenergy/eeactionplan.htm> 


To create a sustainable, aggressive national commitment to energy efficiency 


4-17 



















Rate Design 



Retail electricity and natural gas utility rate structures and price levels influence customer consumption, 
and thus are an important tool for encouraging the adoption of energy-efficient technologies and 
practices. The rate design process typically involves balancing multiple objectives, among which energy 
efficiency is often overlooked. Successful rate designs must balance the overall design goals of utilities, 
customers, regulators, and other stakeholders, including encouraging energy efficiency. 


Overview 

Retail rate designs with clear and meaningful price 
signals, coupled with good customer education, can be 
powerful tools for encouraging energy efficiency. At the 
same time, rate design is a complex process that must 
take into account multiple objectives (Bonbright, 1961; 
Philips, 1988). The main priorities for rate design are 
recovery of utility revenue requirements and fair appor¬ 
tionment of costs among customers. 

Other important regulatory and legislative goals include: 

• Stable revenues for the utility. 

• Stable rates for customers. 

• Social equity in the form of lifeline rates for essential 
needs of households (PURPA of 1978). 

• Simplicity of understanding for customers and ease 
of implementation for utilities. 

•Economic efficiency to promote cost-effective load 
management. 

This chapter considers the additional goal of encouraging 
investment in energy efficiency. While it is difficult to 
achieve every goal of rate design completely, considera¬ 
tion of a rate design's impact on adoption of energy effi¬ 
ciency and any necessary trade-offs can be included as 
part of the ratemaking process. 


Using Rate Design to Promote Energy 
Efficiency 

In developing tariffs to encourage energy efficiency, the 
following questions arise: (1) What are the key rate 
design issues, and how do they affect rate designs for 
energy efficiency? (2) What different rate design options 
are possible, and what are their pros and cons? (3) What 
other mechanisms can encourage efficiency that are not 
driven by tariff savings? and (4) What are the most 
successful strategies for encouraging energy efficiency 
in different jurisdictions? These questions are addressed 
throughout this chapter. 


Leadership Group Recommendations 
Applicable to Rate Design 


• Modify ratemaking practices to promote energy 
efficiency investments. 

• Broadly communicate the benefits of, and 
opportunities for, energy efficiency. 

A more detailed list of options specific to the 
objective of promoting energy efficiency in rate 
design is provided at the end of this chapter. 

Background: Revenues and Rates 

Utility rates are designed to collect a specific revenue 
requirement based on natural gas or electricity sales. As 
rates are driven by sales and revenue requirements, these 
three aspects of regulation are tightly linked. (Revenue 
requirement issues are discussed in Chapter 2: Utility 
Ratemaking & Revenue Requirements.) 


To create a sustainable, aggressive national commitment to energy efficiency 


5-1 






I 


Until the 1970s, rate structures were based on the 
principle of average-cost pricing in which customer 
prices reflected the average costs to utilities of serving 
their customer class. Because so many of a utility's costs 
were fixed, the main goal of rate design up until the 
1970s was to promote sales. Higher sales allowed fixed 
costs to be spread over a larger base and helped push 
rates down, keeping stakeholders content with average- 
cost based rates (Hyman et al., 2000). 

This dynamic began to change in many jurisdictions in 
the 1970s, with rising oil prices and increased emphasis 
on conservation. With the passage of the 1978 Public 
Utility Regulatory Policies Act (PURPA), declining block 
rates were replaced by flat rates or even inverted block 
rates, as utilities began to look for ways to defer new 
plant investment and reduce the environmental impact 
of energy consumption. 

Key Rate Design Issues 

Utilities and regulators must balance competing goals 
in designing rates. Achieving this balance is essential 
for obtaining regulatory and customer acceptance. 
The main rate design issues are described below. 

Provide Recovery of Revenue Requirements 
and Stable Utility Revenues 

A primary function of rates is to let utilities collect their 
revenue requirements. Utilities often favor rate forms 
that maximize stable revenues, such as declining block 
rates. The declining block rate has two or more tiers of 
usage, with the highest rates in the first tier. Tier 1 is 
typically a relatively low monthly usage level that most 
customers exceed. This rate gives utilities a high degree 
of certainty regarding the number of kilowatt-hours 


(kWh) or therms that will be billed in Tier 1. By designings 
Tier 1 rates to collect the utility's fixed costs, the utility 
gains stability in the collection of those costs. At the 
same time, the lower Tier 2 rates encourage higher 
energy consumption rather than efficiency, which is 
detrimental to energy efficiency impacts. 1 Because 
energy efficiency measures are most likely to change 
customer usage in Tier 2, customers will see smaller 
bill reductions under declining block rates than under 
flat rates. Although many utilities have phased out 
declining block rates, a number of utilities continue to 
offer them. 2 

Another rate element that provides revenue stability 
but also detracts from the incentive to improve efficiency 
is collecting a portion of the revenue requirement 
through a customer charge that is independent of 
usage. Because the majority of utility costs do not vary 
with changes in customer usage level in the short run, 
the customer charge also has a strong theoretical basis. 
This approach has mixed benefits for energy efficiency. 
On one hand, a larger customer charge means a smaller 
volumetric charge (per kWh or therm), which lowers 
the customer incentive for energy efficiency. On the 
other hand, a larger customer charge and lower volu¬ 
metric charge reduces the utilities profit from increased 
sales, reducing the utility disincentive to promote energy 
efficiency. 

Rate forms like declining block rates and customer 
charges promote revenue stability for the utility, but 
they create a barrier to customer adoption of energy 
efficiency because they reduce the savings that cus¬ 
tomers can realize from reducing usage. In turn, elec¬ 
tricity demand is more likely to increase, which could 
lead to long-term higher rates and bills where new 
supply is more costly than energy efficiency. To pro¬ 
mote energy efficiency, a key challenge is to provide a 


1 Brown and Sibley (1986) opine that a declining block structure can promote economic efficiency if the lowest tier rate can be set above marginal cost, 
while inducing additional consumption by some consumers. A rising marginal cost environment suggests, however, that a declining block rate structure 
with rates below the increasing marginal costs is economically inefficient. 

2 A partial list of utilities with declining block residential rates includes: Dominion Virginia Power, VA; Appalachian Power Co, VA; Indianapolis Power and 
Light Co., IN; Kentucky Power Co., KY; Cleveland Electric Ilium Co., OH; Toledo Edison Co., OH; Rappahannock Electric Coop, VA; Lincoln Electric System, 
NE; Cuivre River Electric Coop Inc., MO; Otter Tail Power Co., ND; Wheeling Power Co., WV; Matanuska Electric Assn Inc., AK; Homer Electric Association 
Inc., AK; Lower Valley Energy, NE. 


5-2 National Action Plan for Energy Efficiency 






level of certainty to utilities for revenue collection 
without dampening customer incentive to use energy 
more efficiently. 

Fairly Apportion Costs Among Customers 

Revenue allocation is the process that determines the 
share of the utility's total revenue requirement that will 
be recovered from each customer class. In regulatory 
proceedings, this process is often contentious, as each 
customer class seeks to pay less. This process makes it 
difficult for utilities to propose rate designs that shift 
revenues between different customer classes. 

In redesigning rates to encourage energy efficiency, it is 
important to avoid unnecessarily or inadvertently shifting 
costs between customer classes. Rate design changes 
should instead focus on providing a good price signal for 
customer consumption decisions. 

Promote Economic Efficiency for Cost- 
Effective Load Management 

According to economic theory, the most efficient out¬ 
come occurs when prices are equal to marginal costs, 
resulting in the maximum societal net benefit from 
consumption. 

Marginal Costs 

Marginal costs are the changes in costs required to pro¬ 
duce one additional unit of energy. In a period of rising 
marginal costs, rates based on marginal costs more real¬ 
istically reflect the cost of serving different customers, 
and provide an incentive for more efficient use of 
resources (Bonbright, 1961; Kahn, 1970; Huntington, 
1975; Joskow, 1976; Joskow, 1979). 

A utility's marginal costs often include its costs of comply¬ 
ing with local, state, and federal regulations (e.g., Clean 
Air Act), as well as any utility commission policies address¬ 
ing the environment (e.g., the use of the societal test for 
benefit-cost assessments). Rate design based on the 
utility's marginal costs that promotes cost-effective energy 


efficiency will further increase environmental protection 
by reducing energy consumption. 

Despite its theoretical attraction, there are significant bar¬ 
riers to fully implementing marginal-cost pricing in elec¬ 
tricity, especially at the retail level. In contrast to other 
commodities, the necessity for generation to match load 
at all times means that outputs and production costs are 
constantly changing, and conveying these costs as real 
time "price signals" to customers, especially residential 
customers, can be complicated and add additional costs. 
Currently, about half of the nation's electricity customers 
are served by organized real-time electricity markets, 
which can help provide time-varying prices to customers 
by regional or local area. 

Notwithstanding the recent price volatility, exacerbated 
by the 2005 hurricane season and current market condi¬ 
tions, wholesale natural gas prices are generally more 
stable than wholesale electricity prices, largely because 
of the ability to store natural gas. As a result, marginal 
costs have been historically a less important issue for 
natural gas pricing. 

Short-Run Versus Long-Run Price Signals 

There is a fundamental conflict between whether electricity 
and natural gas prices should reflect short-run or long-run 
marginal costs. In simple terms, short-run costs reflect the 
variable cost of production and delivery, while long-run 
costs also include the cost of capital expansion. For pro¬ 
grams such as real-time pricing in electricity, short-run 
marginal costs are used for the price signals so they can 
induce efficient operating decisions on a daily or hourly 
basis. 

Rates that reflect long-run marginal costs will promote 
economically efficient investment decisions in energy 
efficiency, because the long-run perspective is consistent 
with the long expected useful lives of most energy effi¬ 
ciency measures, and the potential for energy efficiency 
to defer costly capital investments. For demand-response 
and other programs intended to alter consumption on a 
daily or hourly basis, however, rates based on short-run 


To create a sustainable, aggressive national commitment to energy efficiency 


5-3 




Applicability of Rate Design Issues 


Implications for Clean Distributed Generation and 
Demand Response. The rate issues for energy effi¬ 
ciency also apply to clean distributed generation and 
demand response, with two exceptions. Demand 
response is focused on reductions in usage that occur 
for only a limited number of hours in a year, and occur 
at times that are not known far in advance (typically 
no more than one day notice, and often no more than 
a few hours notice). Because of the limited hours of 
operation, the revenue erosion from demand 
response is small compared to an energy efficiency 
measure. In addition, it could be argued that short- 
run, rather than long-run, costs are the appropriate 
cost metric to use in valuing and pricing demand 
response programs. 

Public Versus Private Utilities. The rate issues are 
essentially the same for both public and private utili¬ 
ties. Revenue stability might be a lesser concern for 
public utilities, as they could approach their city 
leaders for rate changes. Frequent visits to council 
chambers for rate changes might be frowned upon, 
however, so revenue stability will likely remain impor¬ 
tant to many public utilities as well. 


Gas Versus Electric. As discussed above, gas marginal 
costs are less volatile than electricity marginal costs, so 
providing prices that reflect marginal costs is generally 
less of a concern for the gas utilities. In addition, the 
nature of gas service does not lend itself to complicated 
rate forms such as those seen for some electricity cus¬ 
tomers. Nevertheless, gas utilities could implement 
increasing tier block rates, and/or seasonally differen¬ 
tiated rates to stimulate energy efficiency. 

Restructured Versus Non-Restructured Markets. 
Restructuring has had a substantial impact on the 
funding, administration, and valuation of energy effi¬ 
ciency programs. It is no coincidence that areas with 
high retail electricity rates have been more apt to 
restructure their electricity markets. The higher rates 
increase the appeal of energy efficiency measures, and 
the entry of third-party energy service companies can 
increase customer interest and education regarding 
energy efficiency options. In a retail competition envi¬ 
ronment, however, there might be relatively little rate¬ 
making flexibility. In several states, restructuring has 
created transmission and distribution-only utilities, so 
the regulator's ability to affect full electricity rates 
might be limited to distribution costs and rates for 
default service customers. 


marginal cost might be more appropriate. Therefore, in 
developing retail rates, the goals of short-run and long- 
run marginal based pricing must be balanced. 

Cost Causation 

Using long-run marginal costs to design an energy- 
efficiency enhancing tariff can present another challenge 
—potential inconsistency with the cost-causation princi¬ 
ple that a tariff should reflect the utility's various costs of 
serving a customer. This potential inconsistency diminishes 
in the long run, however, because over the long run, 
some costs that might be considered fixed in the near 
term (e.g., generation or transmission capacity, new 
interstate pipeline capacity or storage) are actually vari¬ 
able. Such costs can be reduced through sustained load 


reductions provided by energy efficiency investment, 
induced by appropriately designed marginal cost-based 
rates. Some costs of a utility do not vary with a cus¬ 
tomer's kWh usage (e.g., hookup and local distribution). 
As a result, a marginal cost-based rate design may 
necessarily include some fixed costs, which can be 
collected via a volumetric adder or a relatively small 
customer charge. However, utilities that set usage rates 
near long-run marginal costs will encourage energy effi¬ 
ciency and promote other social policy goals such as 
affordability for low-income and low-use customers 
whose bills might increase with larger, fixed charges. 
Hence, a practical implementation of marginal-cost 
based ratemaking should balance the trade-offs and 
competing goals of rate design. 



5-4 National Action Plan for Energy Efficiency 

















Provide Stable Rates and Protect Low-Income Customers 

Rate designs to promote energy efficiency must con¬ 
sider whether or not the change will lead to bill 
increases. Mitigating large bill increases for individual 
customers is a fundamental goal of rate design, and 
in some jurisdictions low-income customers are also 
afforded particular attention to ensure that they are 
not adversely affected by rate changes. In some cases, 
low-income customers are eligible for special rates or 
rate riders that protect them from large rate increases, 
as exemplified by the lifeline rates provision in Section 
114 of the 1978 PURPA. Strategies to manage bill 
impacts include phasing-in rate changes to reduce the 
rate shock in any single year, creating exemptions for 
certain at-risk customer groups, and disaggregating 
customers into small customer groups to allow more 
targeted rate forms. 

Because of the concern over bill impacts, new and inno¬ 
vative rates are often offered as voluntary rates. While 
improving acceptance, voluntary rate structures generally 
attract a relatively small percentage of customers (less 
than 20 percent) unless marketed heavily by the utility. 
Voluntary rates can lead to some "free riders," meaning 
customers who achieve bill reductions without changing 
their consumption behavior and providing any real sav¬ 
ings to the utility. Rates to promote energy efficiency can 
be offered as voluntary, but the low participation and 
free rider issues should be taken into account in their 
design to ensure that the benefits of the consumption 
changes they encourage are at least as great as the 
resulting bill decreases. 

Maintain Rate Simplicity 

Economists and public policy analysts can become enam¬ 
ored with efficient pricing schemes, but customers gen¬ 
erally prefer simple rate forms. The challenge for 
promoting energy efficiency is balancing the desire for 
rates that provide the right signals to customers with the 
need to have rates that customers can understand, and 
to which they can respond. Rate designs that are too 
complicated for customers to understand will not be 


effective at promoting efficient consumption decisions. 
Particularly in the residential sector, customers might pay 
more attention to the total bill than to the underlying 
rate design. 

Addressing the Issues: 

Alternative Approaches 

The prior sections listed the issues that stakeholders 
must balance in designing new rates. This section 
presents some traditional and non-traditional rate 
designs and discusses their merits for promoting energy 
efficiency. The alternatives described below vary by 
metering/billing requirement, information complexity, 
and ability to reflect marginal cost.3 

Rate Design Options 
Inclining Tier Block 

Inclining tier block rates, also referred to as inverted 
block rates, have per-unit prices that increase for each 
successive block of energy consumed. Inclining tiered 
rates offer the advantages of being simple to understand 
and simple to meter and bill. Inclining rates can also 
meet the policy goal of protecting small users, which 
often include low-income customers. In fact, it was the 
desire to protect small users that prompted the initiation 
of increasing tiers in California. Termed "lifeline rates" at 
the time, the intention was to provide a small base level 
of electricity to all residential customers at a low rate, 
and charge the higher rate only to usage above that 
base level. The concept of lifeline rates continues in var¬ 
ious forms for numerous services such as water and 
sewer services, and can be considered for delivery or 
commodity rates for electricity and natural gas. However, 
in many parts of the country, low-income customers are 
not necessarily low-usage customers, so a lifeline rate 
might not protect all low-income customers from 
energy bills. 


3 As part of its business model, a utility may use innovative rate options for the purpose of product differentiation. For example, advanced metering that 
enables a design with continuously time-varying rates can apply to an end-use (e.g., air conditioning) that is the main contributor to the utility's system 
peak. Another example is the bundling of sale of electricity and consumer devices (e.g., a 10-year contract for a central air conditioner whose price 
includes operation cost). 


To create a sustainable, aggressive national commitment to energy efficiency 


5-5 






Tiered rates also provide a good fit for regions where 
the long-run marginal cost of energy exceeds the cur¬ 
rent average cost of energy. For example, regions with 
extensive hydroelectric resources might have low aver¬ 
age costs, but their marginal cost might be set by much 
higher fossil plant costs or market prices (for purchase 
or export). 

See Table 5-1 for additional utilities that offer inclining 
tier residential rates. 

Time of Use (TOU) 

TOU rates establish varying charges by season or time of 
day. Their designs can range from simple on- and off- 
peak rates that are constant year-round to more compli¬ 
cated rates with seasonally differentiated prices for sev¬ 
eral time-of-day periods (e.g., on-, mid- and off-peak). 
TOU rates have support from many utilities because of 
the flexibility to reflect marginal costs by time of delivery. 

TOU rates are commonly offered as voluntary rates for 
residential electric customers, 4 and as mandatory rates 
for larger commercial and industrial customers. Part of 
the reason for TOU rates being applied primarily to 


larger users is the additional cost of TOU metering and ft 
billing, as well as the assumed greater ability of larger 
customers to shift their loads. 

TOU rates are less applicable to gas rates, because the 
natural storage capability of gas mains allows gas utilities 
to procure supplies on a daily, rather than hourly, basis. 
Additionally, seasonal variations are captured to a large 
extent in costs for gas procurement, which are typically 
passed through to the customer. An area with con¬ 
strained seasonal gas transportation capacity, however, 
could merit a higher distribution cost during the con¬ 
strained season. Alternatively, a utility could recover a 
higher share of its fixed costs during the high demand 
season, because seasonal peak demand drives the 
sizing of the mains. 

As TOU rates are typically designed to be revenue- 
neutral with the status quo rates, a high on-peak price 
will be accompanied by a low off-peak price. Numerous 
studies in electricity have shown that while the high on- 
peak prices do cause a reduction in usage during that 
period, the low off-peak prices lead to an increase in 
usage in the low-cost period. There has also been an 


Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates | 

Utility Name 

State 

Tariff URL 

Florida Power and Light 

FL 

http://www.fpl.com/access/contents/how_to_read_your_bill.shtml 

Consolidated Edison 

NY 

http://www.coned.com/documents/elec/201-210.pdf 

Pacific Gas & Electric 

CA 

http://www.pge.com/res/financial_assistance/medical_baseline_life_support/ 
understanding/index. html#topic4 

Southern California Edison 

CA 

http://www.sce.com/NR/rdonlyres/728FFC8C-91 FD-4917-909B- 

Arizona Public Service Co 

AZ 

https://www.aps.com/my_account/RateComparer.html 

Sacramento Municipal Util Dist 

CA 

http://www.smud.org/residential/rates.html 

Indiana Michigan Power Co 

Ml 

https://www.indianamichiganpower.com/global/utilities/tariffs/ 
Michigan/MISTDI -31 -06.pdf 

Modesto Irrigation District 

CA 

http://www.mid.org/services/tariffs/rates/ums-d-residential.pdf 

Turlock Irrigation District 

CA 

http://www.tid.org/Publisher_PDFs/DE.pdf 

Granite State Electric Co 

NH 

http://www.nationalgridus.com/granitestate/home/rates/4_d.asp 

Vermont Electric Cooperative, Inc 

VT 

http://www.vtcoop.com/PageViewer.aspx?PageName=Rates%20Summary 

City of Boulder 

NV 

http://www.bcnv.org/utilities. html#electric,waterandsewer 


4 For a survey of optional rates with voluntary participation, see Horowitz and Woo (2006). 


5-6 National Action Plan for Energy Efficiency 

















"income effect" observed where people buy more energy 
as their overall bill goes down, due to switching con¬ 
sumption to lower price periods. The net effect might 
not be a significant decrease in total electricity usage, 
but TOU rates do encourage reduced usage when that 
reduction is the most valuable. Another important con¬ 
sideration with TOU prices is the environmental impact. 
Depending on generation mix and the diurnal emissions 
profile of the region, shifting consumption from the on- 
peak period to off-peak period might provide environ¬ 
mental net benefits. 

The Energy Policy Act of 2005 Section 1252 requires 
states and non-regulated utilities, by August 8, 2007, to 
consider adopting a standard requiring electric utilities to 
offer all of their customers a time-based rate schedule 
such as time-of-use pricing, critical peak pricing, real¬ 
time pricing, or peak load reduction credits. 

Dynamic Rates 

Under a dynamic rate structure, the utility has the ability 
to change the cost or availability of power with limited, 
or no, notice. Common forms of dynamic rates include 
the following: 

• Real-time pricing (RTP) rates vary continuously over 
time in a way that directly reflects the wholesale price 
of electricity. 

•Critical peak pricing (CPP) rates have higher rates 
during periods designated as critical peak periods by 
the utility. Unlike TOU blocks, the days in which critical 
peaks occur are not designated in the tariff, but are 
designated on relatively short notice for a limited 
number of days during the year. 

• Non-firm rates typically follow the pricing form of the 
otherwise applicable rates, but offer discounts or 
incentive payments for customers to curtail usage during 
times of system need (Horowitz and Woo, 2006). Such 
periods of system need are not designated in advance 
through the tariff, and the customer might receive little 
notice before energy supply is interrupted. In some 


cases, customers may be allowed to "buy through" 
periods when their supply will be interrupted by paying 
a higher energy charge (a non-compliance penalty). In 
those cases, the non-firm rate becomes functionally 
identical to CPP rates. 

Dynamic rates are generally used to: 1) promote load 
shifting by large, sophisticated users, 2) give large users 
access to low "surplus energy" prices, or 3) reduce peak 
loads on the utility system. Therefore, dynamic rates are 
complementary to energy efficiency, but are more useful 
for achieving demand response during peak periods than 
reducing overall energy usage. 

Two-Part Rates 

Two-part rates refer to designs wherein a base level of 
customer usage is priced at rates similar to the status 
quo (Part 1) and deviations from the base level of usage 
are billed at the alternative rates (Part 2). Two-part rates 
are common among RTP programs to minimize the free 
rider problem. By implementing a two-part rate, cus¬ 
tomers receive the real time price only for their change 
in usage relative to their base level of usage. Without the 
two-part rate form, most low load-factor customers on 
rates with demand charges would see large bill reduc¬ 
tions for moving to an RTP rate. 

A two-part rate form, however, could also be combined 
with other rate forms that are more conducive to energy 
efficiency program adoption. For example, a two-part 
rate could be structured like an increasing tiered block 
rate, with the Tier 1 allowance based on the customer's 
historical usage. This structure would address many of 
the rate design barriers such as revenue stability. Of 
course, there would be implementation issues, such as 
determining what historical period is used to set Part 1, 
and how often that baseline is updated to reflect 
changes in usage. Also, new customers would need to 
be assigned an interim baseline. 


To create a sustainable, aggressive national commitment to energy efficiency 


5-7 




Demand Charges 

Demand charges bill customers based on their peak usage 
rather than their total usage during the month. For electric¬ 
ity, demand charges are based on usage during particular 
TOU periods (e.g., peak demand) or usage during any peri¬ 
od in the month (e.g., maximum demand). Demand 
charges can also use a percentage of the highest demand 
over the prior year or prior season as a minimum demand 
level used for billing. For natural gas, demand can be based 
on the highest monthly usage over the past year or season. 

For both gas and electricity, utilities prefer demand 
charges over volumetric charges because they provide 
greater revenue certainty, and encourage more consis¬ 
tent asset utilization. In contrast to a demand charge, a 
customer charge that covers more of a utility's fixed costs 
reduces profits from increased sales, and the utility 
disincentive to promote energy efficiency. 

For energy efficiency programs, demand charges could 
help promote reductions in usage for those end uses 
that cause the customer's peak. 5 In general, however, 
volumetric rates are more favorable for energy efficiency 
promotion. Increasing the demand charges would 
reduce the magnitude of the price signal that could be 
sent through a volumetric charge. 

Mechanisms Where Customer Benefits Are 
Not Driven by Tariff Savings 

The rate design forms discussed above allow customers 
to benefit from energy efficiency through bill reductions; 
however, other types of programs provide incentives that 
are decoupled from the customer's retail rate. 

Discount for Efficiency via Conservation Behavior 

In some cases, energy efficiency benefits are passed on to 
customers through mechanisms other than retail rates. For 
example, in California the "20/20" program was imple¬ 
mented in 2001, giving customers a 20 percent rebate off 
their summer bills if they could reduce their electricity 


f 

'l I 

consumption by 20 percent compared to the summer peri- ^ 
od the prior year. The program's success was likely due to 
a combination of aggressive customer education, energy 
conservation behavior (reducing consumption through lim¬ 
iting usage of appliances and end-uses) and investment in 
energy efficiency. Pacific Gas & Electric (PG&E) has just 
implemented a similar program for natural gas, wherein 
customers can receive a rebate of 20 percent of their last 
winter's bill if they can reduce natural gas usage by 10 per¬ 
cent this winter season. The 20/20 program was popular 
and effective. It was easy for customers to understand, and 
there might be a psychological advantage to a program 
that gives you a rebate (a received reward), as opposed to 
one that just allows you to pay less than you otherwise 
would have (a lessened penalty). Applying this concept 
might require some adjustments to account for changes in 
weather or other factors. 

Benefit Sharing 

There are two types of benefit sharing with customers. 6 
Under the first type of shared savings, a developer (utility 
or third party) installs an energy-saving device. The cus¬ 
tomer shares the bill savings with the developer until the 
customer's project load has been paid off. In the second 
type of shared savings, the utility is typically the developer 
and installs an energy efficiency or distributed genera¬ 
tion device at the customer site. The customer then pays 
an amount comparable to what the bill would have been 
without the device or measures installed, less a portion 
of the savings of the device based on utility avoided 
costs. This approach decouples the customer benefits 
from the utility rate, but it can be complicated to deter¬ 
mine what the consumption would have been without 
the device or energy efficiency. 

PacifiCorp in Oregon tackled this problem by offering a 
cash payment of 35 percent of the cost savings for residen¬ 
tial weatherization measures, where the cost savings was 
based on the measure's expected annual kWh savings and 
a schedule of lifecycle savings per kWh (PacifiCorp, 2002). 


5 Horowitz and Woo (2006) show that demand charges can be used to differentiate service reliability, thus implementing curtailable and interruptible service 
programs that are useful for meeting system resource adequacy. 

6 Note that benefit sharing is not the same as "shared savings," used in the context of utility incentives for promoting energy efficiency programs. 


5-8 National Action Plan for Energy Efficiency 











■ 


Table 5-2. Pros and Cons of Rate Design Forms 


Program Type 


Criteria 

Avoided Cost Benefits 
and Utility Incentives 

Energy and Peak 
Reductions 

Customer Incentive and 
Bill Impact 

Impact on Non- 
Participants 

Implementation and 
Transition Issues 

Increasing Tier Block 
(Inverted block) 

http://www.pge.com/ 
tariffs/pdf/E-1 .pdf 

http://www.sdge.com/ 

tm2/pdf/DR.pdf 

http://www.sdge.com/ 

tm2/pdf/GR.pdf 

Pro: Good match when 
long-run marginal costs 
are above average 
costs. 

Con: Might not be the 
right price signal if long- 
run marginal costs are 
below average costs. 

Pro: Can achieve annual 
energy reductions. 

Con: Does not encourage 
reductions in any partic¬ 
ular period (unless com¬ 
bined with a time-based 
rate like TOU). 

Pro: Provides strong 
incentive to reduce 
usage. 

Con: Could result in 
large bill increases for 
users that cannot change 
their usage level, and 
could encourage more 
usage by the smaller 
customers. 

Pro: If mandatory, little 
impact on other customer 
classes. 

Con: Could not be 
implemented on a 
voluntary basis because 
of free rider losses. 

Pro: Simple to bill with 
existing meters. 

Con: Could require 
phased transition to 
mitigate bill impacts. 

Time of Use (TOU) 

http://www.nationalgridus 

.com/masselectric/ 

home/rates/4_tou.asp 

Pro: (1) Low implemen¬ 
tation cost; (2) Tracks 
expected marginal 
costs. 

Con: Unclear if marginal 
costs should be short- 
or long-run. 

Pro: Can achieve peak 
load relief. 

Con: Might not achieve 
substantial energy 
reductions or produce 
significant emissions 
benefits. 

Pro: Provides customers 
with more control over 
their bills than flat rates, 
and incentive to reduce 
peak usage. 

Con: If mandatory, 
could result in large bill 
increases for users that 
cannot change their 
usage pattern. 

Pro: If mandatory, little 
average impact, but 
can be large on some 
customers. 

Con: If optional, 
potentially large impact 
due to free riders, which 
can be mitigated by a 
careful design. 

Pro: Extensive industry 
experience with TOU 
rate. 

Con: (1) If mandatory, 
likely opposed by 
customers, but not 
necessarily the utility; 

(2) If optional, opposed 
by non-participants and 
possibly the utility. 

Dynamic Rates: Real 
Time Pricing (RTP) 

http://www.exeloncorp.co 

m/comed/library/pdfs/ 

advance_copy_tariff_ 

revision6.pdf 

http://www.southern 

company.com/ 

gulfpower/pricing/gulf_ 

rates.asp?mnuOpco=gulf 

&mnuType-com&mnulte 

m=er#rates 

http://www.nationalgridus 

.com/niagaramohawk/ 

non_html/rates_psc207 

.pdf 

Pro: (1) Tracks day- 
ahead or day-of short- 
run marginal cost for 
economically efficient 
daily consumption 
decisions; (2) RTP rates 
can be set to help 
allocate capacity in an 
economically efficient 
manner during 
emergencies. 

Con: No long-run price 
signal for investment 
decisions. 

Pro: Can achieve peak 
load relief. 

Con: (1) Not applicable 
to gas; (2) Might not 
achieve substantial 
annual energy reductions 
or produce significant 
emissions benefits. 

Same as above. 

Same as above. 

Con: (1) If mandatory, 
likely opposed by 
customers and the utility 
due to complexity and 
implementation cost; 

(2) High implementation 
cost for metering and 
information system 
costs. 

Dynamic Rates: 

Critical Peak Pricing 
(CPP) 

http://www.southerncom- 

pany.com/gulfpower/ 

pricing/pdf/rsvp.pdf 

http://www.idahopower. 

com/aboutus/ 

regulatoryinfo/tariffPdf. 

asp?id=263&.pdf 

http://www.pge.com/ 

tariffs/pdf/E-3.pdf 

Pro: (1) Tracks short-run 
marginal cost shortly 
before emergency; (2) If 
the CPP rates are set at 
correctly predicted 
marginal cost during 
emergency, they ration 
capacity efficiently. 

Con: High implementa¬ 
tion cost. 

Pro: Likely to achieve 
load relief. 

Con: Unlikely to provide 
significant annual energy 
reductions. 

Same as above. 

Pro: Little impact, 
unless the utility heavily 
discounts the rate for 
the non-critical hours. 

Con: (1) If mandatory, 
likely opposed by 
customers and the 
utility due to high 
implementation cost; 

(2) If optional, few would 
object, unless the 
implementation cost 
spills over to other 
customer classes. 


To create a sustainable, aggressive national commitment to energy efficiency 


5-9 

















' 


Table 5-2. Pros and Cons of Rate Design Forms (continued) 


Program Type 

Criteria 



Avoided Cost Benefits 
and Utility Incentives 

Energy and Peak 
Reductions 

Customer Incentive and 
Bill Impact 

Impact on 
Non-Participants 

Implementation and 
Transition Issues 

Dynamic Rates 

Nonfirm 

http://www.pacificorp.com 

/Regulatory_Rule_Schedul 

e/Regulatory_Rule_Sched 

ule2220.pdf 

Pro: (1) Provides 
emergency load 
relief to support 
system reliability; 

(2) Implements 
efficient rationing. 

Con: (1) Does not track 
costs; (2) Potentially 
high implementation 
cost. 

Pro: (1) Can achieve 
load reductions to meet 
system needs; 

(2) Applicable to both 
gas and electric service. 

Con: Unlikely to 
encourage investment 
in energy efficiency 
measures. 

Pro: Bill savings com¬ 
pensate customer for 
accepting lower 
reliability. 

Pro: Little impact, 
unless the utility offers a 
curtailable rate discount 
that exceeds the utility's 
expected cost savings. 

Pro: (1) If optional, non¬ 
participants would not 
object unless discount is 
"excessive"; (2) If man¬ 
datory, different levels of 
reliability (at increasing 
cost) would need to be 
offered. 

Con: Complicated 
notice and monitoring 
requirements. 

Two-Part Rates 

http://www.aepcustomer. 

com/tariffs/Michigan/pdf/ 

MISTD4-28-05.pdf: 

Pro: Allows rate to be 
set at utility avoided 
cost. 

Con: Requires estab¬ 
lishing customer base¬ 
line, which is subject 
to historical usage, 
weather, and other 
factors. 

Pro: Can be used to 
encourage or discourage 
peak usage depending 
on characteristics of 
"part two" rate form. 

Pro: Provides incentives 
for changes in customer's 
usage. TTierefore, no 
change in usage results 
in the same bill. 

Pro: Non-participants 
are held harmless. 

Pro: Complexity can 
be controlled through 
design of "part two" 
rate form. 

Con: (1) Customers 
might not be accustomed 
to the concept; 

(2) Difficult to implement 
for many smaller 
customers. 

Demand Charges 

http://www.sce.com/NR/ 
sc3/tm2/pdf/ce30-12.pdf 

Pro: Reflects the cus¬ 
tomer's usage of the 
utility infrastructure. 

Con: Does not con¬ 
sider the duration of 
the usage (beyond 15 
minutes or one hour 
for electric). 

Pro: Can achieve load 
reductions. 

Con: Might not achieve 
substantial annual 
reductions. 

Pro: Provides customers 
with incentive to reduce 
peak usage and flatten 
their usage profile. 

Con: If mandatory, 
could result in large bill 
increases for users who 
cannot change their 
usage pattern. 

Pro: If mandatory, little 
average impact, but can 
be large on some cus¬ 
tomers. 

Con: If optional, poten¬ 
tially large impact due 
to free riders, but this 
can be mitigated by a 
careful design. 

Con: (1) If mandatory, 
likely opposed by 
customers and the utility 
due to high implementa¬ 
tion cost; (2) If optional, 
few would object, unless 
the implementation cost 
spills over to other 
customer classes. 

Discount for 

Efficiency, Benefit 
Sharing, etc. 

http://www.cpuc.ca.gov/ 
PUBLISHED/NEWS 
RELEASE/51362.htm 

http://www.pacificorp. 

com/Regulatory_Rule_ 

Schedule/Regulatory_Rule 

_Schedule7794.pdf 

Pro: Incentive can be 
tied directly to avoided 
costs, without the 
need to change 
overall rate design. 

Con: Only a portion 
of the benefits are 
reflected in the incen¬ 
tive, as rate savings 
will still be a factor 
for most options. 

Pro: Utilities generally 
have control over what 
measures are eligible for 
an incentive, so the mix 
of peak and energy sav¬ 
ings can be determined 
during program design. 

Con: Impacts might be 
smaller than those 
attainable through 
mandatory rate 
programs. 

Pro: (1) Provides direct 
incentive for program 
participation, plus 
ongoing bill reductions 
(for most options); 

(2) Does not require rate 
changes. 

Con: Existing rate forms 
might impede adoption 
because of overly low 
bill savings. 

Pro: Reflects the 
characteristics of the 
underlying rate form. 

Pro: Implementation 
simplified by the ability 
to keep status quo rates. 

Con: Places burden for 
action on the energy 
efficiency implemented 
whereas a mandatory 
rate change could 
encourage customers to 
seek out efficiency 
options. 

Energy Efficiency 
Customer Rebate 
Programs (e.g., 20/20 
program in California) 

www.sce.com/Rebatesand 

Savings/2020 

www.sdge.com/tm2/pdf/ 

20-20-TOU.pdf 

www.pge.com/tariffs/pdf/ 

EZ-2020.pdf 

Pro: Can avoid more 
drastic rationing 
mechanisms when 
resources are signifi¬ 
cantly constrained. 

Con: Customer 
discounts are not set 
based on utility cost 
savings, and therefore 
these programs might 
over-reward cutomers 
who qualify. 

Pro: (1) Links payment 
of incentive directly to 
metered energy savings; 
(2) Easy to measure and 
verify. 

Con: Focused on 
throughput and not 
capacity savings. 

Pro: (1) Provides a clear 
incentive to customers to 
reduce their energy usage, 
motivates customers, and 
gets them thinking about 
their energy usage; 

(2) Can provide significant 
bill savings; (3) Doesn't 
require customers to sign 
up for any program and 
can be offered to 
everyone. 

Con: Shifts costs to non¬ 
participants to the 
extent that the rebate 
exceeds the change in 
utility cost. 

Pro: Very successful 
during periods when 
public interest is served 
for short-term resource 
savings, (e.g. energy 
crisis.) 

Con: Implementation 
and effectiveness might 
be reduced after being 
in place for several 
- 


5-10 National Action Plan for Energy Efficiency 


























On-Bill Financing 

The primary function of on-bill financing is to remove the 
barrier presented by the high first-time costs of many ener¬ 
gy efficiency measures. On-bill financing allows the cus¬ 
tomer to pay for energy efficiency equipment over time, 
and fund those payments through bill savings. On-bill 
financing can also deliver financial benefits to the partici¬ 
pants by providing them access to low financing costs 
offered by the utility. An example of on-bill financing is the 
"Pay As You Save" (PAYS) program, which provides 
upfront funding in return for a monthly charge that is 
always less than the savings. 7 

Pros and Cons of Various Designs 

Rate design involves tradeoffs among numerous goals. 
Table 5-2 summarizes the pros and cons of the various 
rate design forms from various stakeholder perspectives, 
considering implementation and transition issues. In most 
cases, design elements can be combined to mitigate 


weaknesses of any single design element, so the table 
should be viewed as a reference and starting point. 

Successful Strategies 

Rate design is one of a number of factors that contribute 
to the success of energy efficiency programs. Along with 
rate design, it is important to educate customers about 
their rates so they understand the value of energy effi¬ 
ciency investment decisions. Table 5-3 shows examples 
of four states with successful energy efficiency programs 
and complementary rate design approaches. Certainly, 
one would expect higher rates to spur energy efficiency 
adoption, and that appears to be the case for three of 
the four example states. However, Washington has an 
active and cost-effective energy efficiency program, 
despite an average residential rate far below the national 
average of 10.3 cents per kWh. (EIA, 2006) 


Table 5-3. Conditions That Assist Success 


California 


Washington State 


Massachusetts 


New York 


Rate Forms 
and Cost 
Structures 


Increasing tier block rates for residen¬ 
tial (PG&E, SCE, and SDG&E). 
Increasing block rate for residential 
gas (SDG&E). 

http://www.pge.com/tariffs/pdf/E-1.pdf 

http://www.sce.com/NR/sc3/tm2/pdf/ 

ce12-12.pdf 

http://www.sdge.com/tm2/pdf/DR.pdf 

http://www.sdge.com/tm2/pdf/GR.pdf 


Increasing tier block rates for resi¬ 
dential electric (PacifiCorp). Gas 
rates are flat volumetric (Puget 
Sound Electric [PSE]). High export 
value for electricity, especially in 
the summer afternoon. 

http://www.pacificorp.com/Regulat 

ory_Rule_Schedule/Regulatory_ 

Rule_Schedule2205.pdf 


Flat electricity rates per 
kWh with voluntary TOU 
rates for distribution service 
(Massachusetts Electric). 

http://www.nationalgridus. 

com/masselectric/non_html/ 

rates_tariff.pdf 


Increasing tier rates for 
residential (Consolidated 
Edison). 

http://www.coned.com/ 

documents/elec/ 

201-210.pdf 


Resource and 
Load 

Characteristics 


Summer electric peaks. Marginal 
resources are fossil units. High mar¬ 
ginal cost for electricity, especially in 
the summer afternoon. Import transfer 
capability can be constrained. Winter 
gas peaks, although electric genera¬ 
tion is flattening the difference. 

http://www.ethree.com/CPUC/ 

E3_Avoided_Costs_Final.pdf 


Winter peaking electric loads, but 
summer export opportunities. 
Heavily hydroelectric, so resource 
availability can vary with precipita¬ 
tion. Gas is winter peaking. 

http://www.nwcouncil.org/energy/ 

powersupply/outlook.asp 

http://www.nwcouncil.org/energy/ 

powerplan/plan/Default.htm 

http://www.pse.com/energyEnviron 

ment/supplyPDFs/!l--Summary%20 

Charts%20and%20Graphs.pdf 


Part of Indpendant System 
Operator New England 
(ISO-NE), which is summer 
peaking. 

http://www.nepool.com/ 
trans/celt/report/2 005/2005 
_celt_report.pdf 


High summer energy costs 
and capacity concerns in 
the summer for the New 
York City area. 

http://www.eia.doe.gov/ 

cneaf/electricity/page/ 

fact_sheets/newyork.html 


7 See http://www.paysamerica.org/. 


To create a sustainable, aggressive national commitment to energy efficiency 


5-11 


















Table 5-3. Conditions That Assist Success (continued) 



California 

Washington State 

Massachusetts 

New York 

Average 
Residential 
Electric Rates 

13.7 cents/kWh 

(EIA, 2006) 

6.7 cents/kWh 

(EIA, 2006) 

17.6 cents/kWh 

(EIA, 2006) 

15.7 cents/kWh 

(EIA, 2006) 

Market and 
Utility 

Structure 

Competitive electric generation and 
gas procurement. Regulated wires 
and pipes. 

http://www.energy.ca.gov/electricity/ 

divestiture.html 

http://www.cpuc.ca.gov/static/ 

energy/electric/ab57_briefing_ 

assembly_may_10.pdf 

Vertically integrated. 

http://www.wutc.wa.gov/ 
webimage.nsf/63517e4423a08d 
e988256576006a80bc/fe15f75d 

7135a7e28825657e00710928! 
OpenDocument 

Competitive generation. 
Regulated wires. 

http://www.eia.doe.gov/ 

cneaf/electricity/page/ 

fact_sheets/mass.html 

Competitive generation. 
Regulated wires. 

http://www.nyserda.org/sep/ 
sepsection2-1 .pdf 

Political and 

Administrative 

Actors 

Environmental advocacy in the past 
and desire to avoid another energy 
capacity crisis. Energy efficiency 
focuses on electricity. 

http://www.energy.ca.gov/ 
2005publications/CEC-999-2005- 
015/CEC-999-2005-015.PDF 

http://www.energy.ca.gov/ 
2005publications/CEC-999-2005- 
011/CEC-999-2005-011 .PDF 

http://www.cpuc.ca.gov/PUBLISHED/ 

NEWS_RELEASE/49757.htm 

http://www.cpuc.ca.gov/static/ 

energy/electric/energy+efficiency/ 

about.htm 

Strong environmental commit¬ 
ment and desire to reduce 
susceptibility to market risks. 

http://www.nwenergy.org/news/ 

news/news_conservation.html 

DSM instituted as an 
alternative to new plant 
construction in the late 

1980s and early 1990s 
(integrated resource man¬ 
agement). Energy efficiency 
now under the oversight of 
Division of Energy 

Resources. 

http://www.mass.gov/Eoca/ 

docs/doer/pub_info/ 

ee-long.pdf 

PSC established policy goals 
to promote competitive energy 
efficiency service and provide 
direct benefits to the people 
of New York. 

On 1/16/06, Governor George 

E. Pataki unveiled "a compre¬ 
hensive, multi-faceted plan 
that will help reduce New 
York's dependence on 
imported energy." 

http://www.getenergysmart. 

org/AboutNYES.asp 

http://www.ny.g 0 v/governor/o 
ress/06/0116062.html 

Demand-Side 
Management 
(DSM) Funding 

System benefits charge (SBC) and 
procurement payment. 

http://www.cpuc.ca.gov/static/ 

energy/electric/energy+efficiency/ 

ee_funding.htm 

SBC. 

http://www.wutc.wa.gov/ 
webimage.nsf/8d712cfdd4796c8 
888256aaa007e94b4/0b2e3934 
3c0be04a88256a3b007449fe! 
OpenDocument 

SBC. 

http://www.mass.gov/Eoca/ 

docs/doer/pub_info/ 

ee-long.pdf 

SBC. 

http://www.getenergysmart. 

org/AboutNYES.asp 


Part of Washington's energy efficiency efforts can be 
explained by the high value for power exports to 
California, and partly by the regional focus on promoting 
energy efficiency. Washington and the rest of the Pacific 
Northwest region place a high social value on environ¬ 
mental protection, so Washington might be a case 
where the success of energy efficiency is fostered by 
high public awareness, and the willingness of the public 
to look beyond the short-term out-of-pocket costs and 
consider the longer term impacts on the environment. 


The other three states shown in Table 5-3 share the com¬ 
mon characteristics of high residential rates, energy effi¬ 
ciency funded through a system benefits surcharge, and 
competitive electric markets. The formation of competi¬ 
tive electric markets could have also encouraged energy 
efficiency by: (1) establishing secure funding sources or 
energy efficiency agencies to promote energy efficiency, 
(2) increasing awareness of energy issues and risks 
regarding future energy prices, and (3) the entrance of 
new energy agents promoting energy efficiency. 


5-12 National Action Plan for Energy Efficiency 
















Key Findings 

This chapter summarizes the challenges and opportuni¬ 
ties for employing rate designs to encourage utility 

promotion and customer adoption of energy efficiency. 

Key findings of this chapter include: 

• Rate design is a complex process that balances 
numerous regulatory and legislative goals. It is impor¬ 
tant to recognize the promotion of energy efficiency in 
the balancing of objectives. 

• Rate design offers opportunities to encourage cus¬ 
tomers to invest in efficiency where they find it to be 
cost-effective, and to participate in new programs that 
provide innovative technologies (e.g., smart meters) to 
help customers control their energy costs. 

• Utility rates that are designed to promote sales or max¬ 
imize stable revenues tend to lower the incentive for 
customers to adopt energy efficiency. 

• Rate forms like declining block rates, or rates with large 
fixed charges reduce the savings that customers can 
attain from adopting energy efficiency. 

•Appropriate rate designs should consider the unique 
characteristics of each customer class. Some general 
rate design options by customer class are listed below. 

— Residential. Inclining tier block rates. These rates 
can be quickly implemented for all residential and 
small commercial and industrial electric and gas 
customers. At a minimum, eliminate declining tier 
block rates. As metering costs decline, also explore 
dynamic rate options for residential customers. 

— Small Commercial. Time of use rates. While these 
rates might not lead to much change in annual 
usage, the price signals can encourage customers 
to consume less energy when energy is the most 
expensive to produce, procure, and deliver. 


— Large Commercial and Industrial. Two-part rates. 
These rates provide bill stability and can be established 
so that the change in consumption through adoption 
of energy efficiency is priced at marginal cost. The 
complexity in establishing historical baseline quantities 
might limit the application of two-part rates to the 
larger customers on the system. 

— All Customer Classes. Seasonal price differentials. 
Higher prices during the higher cost peak season 
encourage customer conservation during the peak 
and can reduce peak load growth. For example, 
higher winter rates can encourage the purchase of 
more efficient space heating equipment. 

• Energy efficiency can be promoted through non-tariff 
mechanisms that reach customers through their utility 
bill. Such mechanisms include: 

— Benefit Sharing Programs. Benefit sharing programs 
can resolve situations where normal customer bill 
savings are smaller than the cost of energy efficiency 
programs. 

— On-Bill Financing. Financing support can help cus¬ 
tomers overcome the upfront costs of efficiency 
devices. 

— Energy Efficiency Rebate Programs. Programs that 
offer discounts to customers who reduce their 
energy consumption, such as the 20/20 rebate pro¬ 
gram in California, offer clear incentives to cus¬ 
tomers to focus on reducing their energy use. 

• More effort is needed to communicate the benefits 
and opportunities for energy efficiency to customers, 
regulators, and utility decision-makers. 


To create a sustainable, aggressive national commitment to energy efficiency 


5-13 




Recommendations and Options 


The National Action Plan for Energy Efficiency Leadership 
Group offers the following recommendations as ways to 
overcome many of the barriers to energy efficiency in 
rate design, and provides a number of options for con¬ 
sideration by utilities, regulators, and stakeholders (as 
presented in the Executive Summary): 

Recommendation: Modify ratemaking practices to 
promote energy efficiency investments. Rate design 
offers opportunities to encourage customers to invest in 
efficiency where they find it to be cost-effective, and to 
participate in new programs that bring them innovative 
technologies (e.g., smart meters) to help them control 
their energy costs. 

Options to Consider: 

•Including the impact on adoption of energy efficiency 
as one of the goals of retail rate design, recognizing 
that it must be balanced with other objectives. 

• Eliminating rate designs that discourage energy effi¬ 
ciency by not increasing costs as customers consume 
more electricity or natural gas. 

• Adopting rate designs that encourage energy efficiency, 
considering the unique characteristics of each cus¬ 
tomer class, and including partnering tariffs with other 
mechanisms that encourage energy efficiency, such as 
benefit sharing programs and on-bill financing. 


Recommendation: Broadly communicate the benefits 
of, and opportunities for, energy efficiency. Experience 
shows that energy efficiency programs help customers 
save money and contribute to lower cost energy sys¬ 
tems. But these impacts are not fully documented nor 
recognized by customers, utilities, regulators and policy¬ 
makers. More effort is needed to establish the business 
case for energy efficiency for all decision-makers, and to 
show how a well-designed approach to energy efficien¬ 
cy can benefit customers, utilities, and society by (1) 
reducing customers bills over time, (2) fostering finan¬ 
cially healthy utilities (return on equity [ROE], earnings 
per share, debt coverage ratios unaffected), and (3) con¬ 
tributing to positive societal net benefits overall. Effort is 
also necessary to educate key stakeholders that, 
although energy efficiency can be an important low-cost 
resource to integrate into the energy mix, it does require 
funding just as a new power plant requires funding. 
Further, education is necessary on the impact that energy 
efficiency programs can have in concert with other energy 
efficiency policies such as building codes, appliance 
standards, and tax incentives. 

Option to Consider: 

•Communicating on the role of energy efficiency in 
lowering customer energy bills and system costs and 
risks over time. 




5-14 National Action Plan for Energy Efficiency 









References 


Baskette, C., Horii, B., Kollman, E., & Price, S. (2006). 
Avoided Cost Estimation and Post-Reform Funding 
Allocation for California's Energy Efficiency 
Programs. Energy, 31:6-7, 1084-1099. 

Bonbright, J.C. (1961). Principles of Public Utility Rates. 
New York: Columbia University Press. 

Brown, S.J. and Sibley, D.S. (1986). The Theory of 
Public Utility Pricing. New York: Cambridge 
University Press. 

Horowitz, I. and Woo, C.K. (2006). Designing Pareto- 
Superior Demand-Response Rate Options. Energy 
31:6-7, 1040-1051. 

Huntington, S. (1975). The Rapid Emergence of 
Marginal Cost Pricing in the Regulation of Electric 
Utility Rate Structures. Boston University Law 
Review, 55: 689-774. 

Hyman, L.S., Hyman, A.S., & Hyman, R.C. (2000). 
America's Electric Utilities: Past, Present, and 
Future, 7th Edition. Arlington, VA: Public Utilities 
Reports. 

Joskow, PL. (1976). Contributions to the Theory of 
Marginal Cost Pricing. Bell Journal of Economics, 
7(1): 197-206. 


Joskow, P. (1979). Public Utility Regulatory Policy Act of 
1978: Electric Utility Rate Reform. Natural 
Resources Journal, 19: 787-809. 

Kahn, A. (1970). The Economics of Regulation. New 
York: John Wiley & Sons. 

PacifiCorp (2002, September 30). Oregon Schedule 9— 
Residential Energy Efficiency Rider Optional 
Weatherization Services. P.U.C. OR No. 35, Advice 
No. 02-027. <http://www.pacificorp.com/Regulatory_ 
Rule_Schedule/Regulatory_Rule_Schedule7794.pdf> 

Phillips, C.F. (1988). The Regulation of Public Utilities: 
Theory and Practice. Arlington, VA: Public Utilities 
Reports. 

Public Utility Regulatory Policies Act (PURPA) of 1978, 
Section 114. 

U.S. Energy Information Administration [EIA] (2006). 
Average Retail Price of Electricity to Ultimate 
Customers by End-Use Sector, by State. Electric 
Power Monthly. 






- ---- 

To create a sustainable, aggressive national commitment to 


energy efficiency 


5-15 

















































Energy Efficiency 
Program Best Practices 





Energy efficiency programs have been operating successfully in some parts of the country since the late 
1980s. From the experience of these successful programs, a number of best practice strategies have 
evolved for making energy efficiency a resource, developing a cost-effective portfolio of energy efficiency pro¬ 
grams for all customer classes, designing and delivering energy efficiency programs that optimize budgets, 
and ensuring that programs deliver results. 


Overview 

Cost-effective energy efficiency programs have been 
delivered by large and small utilities and third-party pro¬ 
gram administrators in some parts of the country since 
the late 1980s. The rationale for utility investment in effi¬ 
ciency programming is that within certain existing mar¬ 
kets for energy-efficient products and services, there are 
barriers that can be overcome to ensure that customers 
from all sectors of the economy choose more energy- 
efficient products and practices. Successful programs 
have developed strategies to overcome these barriers, in 
many cases partnering with industry and voluntary 
national and regional programs so that efficiency pro¬ 
gram spending is used not only to acquire demand-side 
resources, but also to accelerate market-based purchases 
by consumers. 


Leadership Group Recommendations 
Applicable to Energy Efficiency 
Program Best Practices 


• Recognize energy efficiency as a high priority 
energy resource. 

• Make a strong, long-term commitment to 
cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of, and oppor¬ 
tunities for, energy efficiency. 

• Provide sufficient and stable program funding to 
deliver energy efficiency where cost-effective. 

A list of options for promoting best practice energy 
efficiency programs is provided at the end of 
this chapter. 


Challenges that limit greater utility 
investment in energy efficiency include 
the following: 

• The majority of utilities recover fixed operating costs 
and earn profits based on the volume of energy they 
sell. Strategies for overcoming this throughput disin¬ 
centive to greater investment in energy efficiency are 
discussed in Chapter 2: Utility Ratemaking & Revenue 
Requirements. 

• Lack of standard approaches on how to quantify and 
incorporate the benefits of energy efficiency into 
resource planning efforts, and institutional barriers at 
many utilities that stem from the historical business 
model of acquiring generation assets and building 
transmission and distribution systems. Strategies 

for overcoming these challenges are addressed in 
Chapter 3: Incorporating Energy Efficiency in 
Resource Planning. 

• Rate designs that are counterproductive to energy 
efficiency might limit greater efficiency investment by 
large customer groups, where many of the most 
cost-effective opportunities for efficiency program¬ 
ming exist. Strategies for encouraging rate designs 
that are compatible with energy efficiency are dis¬ 
cussed in Chapter 5: Rate Design. 

• Efficiency programs need to address multiple cus¬ 
tomer needs and stakeholder perspectives while 
simultaneously addressing multiple system needs, in 
many cases while competing for internal resources. 
This chapter focuses on strategies for making energy 
efficiency a resource, developing a cost-effective port¬ 
folio of energy efficiency programs for all customer 
classes, designing and delivering efficiency programs 
that optimize budgets, and ensuring that those pro¬ 
grams deliver results are the focus of this chapter. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-1 









Programs that have been operating over the past 
decade, and longer, have a history of proven savings in 
megawatts (MW), megawatt-hours (MWh), and therms, 
as well as on customer bills. These programs show that 
energy efficiency can compare very favorably to supply- 
side options. 

This chapter summarizes key findings from a portfolio- 
level 1 review of many of the energy efficiency programs 
that have been operating successfully for a number of 
years. It provides an overview of best practices in the 
following areas: 

• Political and human factors that have led to increased 
reliance on energy efficiency as a resource. 

• Key considerations used in identifying target measures 2 for 
energy efficiency programming in the near- and long-term. 

• Program design and delivery strategies that can maxi¬ 
mize program impacts and increase cost-effectiveness. 

•The role of monitoring and evaluation in ensuring that 
program dollars are optimized and that energy efficiency 
investments deliver results. 

Background 

Best practice strategies for program planning, design 
and implementation, and evaluation were derived from 
a review of energy efficiency programs at the portfolio 
level across a range of policy models (e.g., public benefit 
charge administration, integrated resource planning). 
The box on page 6-3 describes the policy models and 
Table 6-1 provides additional details and examples of 
programs operating under various policy models. This 
chapter is not intended as a comprehensive review of the 
energy efficiency programs operating around the country, 
but does highlight key factors that can help improve and 


accelerate energy efficiency program success. /J 
Organizations reviewed for this effort have a sustained 
history of successful energy efficiency program imple¬ 
mentation (See Tables 6-2 and 6-3 for summaries of 
these programs) and share the following characteristics: 

•Significant investment in energy efficiency as a 
resource within their policy context. 

• Development of cost-effective programs that deliver 
results. 

• Incorporation of program design strategies that work 
to remove near- and long-term market barriers to invest¬ 
ment in energy efficiency. 

•Willingness to devote the necessary resources to make 
programs successful. 

Most of the organizations reviewed also have conducted 
full-scale impact evaluations of their portfolio of energy 
efficiency investments within the last few years. 

The best practices gleaned from a review of these organ¬ 
izations can assist utilities, their commissions, state energy 
offices, and other stakeholders in overcoming barriers to 
significant energy efficiency programming, and begin 
tapping into energy efficiency as a valuable and clean 
resource to effectively meet future supply needs. 


1 For the purpose of this chapter, portfolio refers to the collective set of energy efficiency programs offered by a utility or third-party energy efficiency 
program administrator. 

2 Measures refer to the specific technologies (e.g., efficient lighting fixture) and practices (e.g., duct sealing) that are used to achieve energy savings. 


6-2 National Action Plan for Energy Efficiency 













Energy Efficiency Programs Are Delivered Within Many Policy Models 


Systems Benefits Charge (SBC) Model 

In this model, funding for programs comes from an SBC 
that is either determined by legislation or a regulatory 
process. The charge is usually a fixed amount per 
kilowatt-hour (kWh) or million British thermal units 
(MMBtu) and is set for a number of years. Once funds 
are collected by the distribution or integrated utility, 
programs can be administered by the utility, a state 
agency, or a third party. If the utility implements the 
programs, it usually receives current cost recovery and 
a shareholder incentive. Regardless of administrative 
structure, there is usually an opportunity for stake¬ 
holder input. 

This model provides stable program design. In some 
cases, funding has become vulnerable to raids by 
state agencies. In areas aggressively pursuing energy 
efficiency as a resource, limits to additional funding 
have created a ceiling on the resource. While predom¬ 
inantly used in the electric sector, this model can, and 
is, being used to fund gas programs. 

Integrated Resource Plan (IRP) Model 
In this model, energy efficiency is part of the utility's 
IRP. Energy efficiency, along with other demand-side 
options, is treated on an equivalent basis with supply. 
Cost recovery can either be in base rates or through a 
separate charge. The utility might receive a sharehold¬ 
er incentive, recovery of lost revenue (from reduced 
sales volume), or both. Programs are driven more by 
the resource need than in the SBC models. This gen¬ 
erally is an electric-only model. The regional planning 
model used by the Pacific Northwest is a variation on 
this model. 


Request For Proposal (RFP) Model 

In this case, a utility or an independent system opera¬ 
tor (ISO) puts out a competitive solicitation RFP to 
acquire energy efficiency from a third-party provider 
to meet demand, particularly in areas where there are 
transmission and distribution bottlenecks or a gener¬ 
ation need. Most examples of this model to date have 
been electric only. The focus of this type of program 
is typically on saving peak demand. 

Portfolio Standard 

In this model, the program adminstrator is subject to 
a portfolio standard expressed in terms of percentage 
of overall energy or demand. This model can include 
gas as well as electric, and can be used independent¬ 
ly or in conjunction with an SBC or IRP requirement. 

Municipal Utility/Electric Cooperative Model 
In this model, programs are administered by a munic¬ 
ipal utility or electric cooperative. If the utility/cooper¬ 
ative owns or is responsible for generation, the energy 
efficiency resource can be part of an IRP. Cost recovery 
is most likely in base rates. This model can include gas 
as well as electric. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-3 














Table 6-1. Overview of Energy Efficiency Programs 



Policy Model/ 
Examples 

Funding 

Type 

Shareholder 

Incentive 1 

Lead 

Administrator 

Role in 
Resource 
Acquisition 

Scope of 
Programs 

Political 

Context 

SBC with utility 
implementation: 

• California 

• Rhode Island 

• Connecticut 

• Massachusetts 

Separate charge 

Usually 

Utility 

Depends on 
whether utility 
owns generation 

Programs for all 
customer classes 

Most programs of 
this type came out 
of a restructuring 
settlement in states 
where there was an 
existing infrastruc¬ 
ture at the utilities 

SBC with state 
or third-party 
implementation: 

• New York 

• Vermont 

• Wisconsin 

Separate charge 

No 

State agency 

Third party 

None or limited 

Programs for all 
customer classes 

Most programs of 
this type came out 
of a restructuring 
settlement 

IRP or gas 
planning model: 

• Nevada 

• Arizona 

• Minnesota 

• Bonneville Power 
Administration (BPA) 
(regional planning 
model as well) 

• Vermont Gas 

• Keyspan 

Varies: in rates, 
capitalized, or 
separate charge 

In some cases 

Utility 

Integrated 

Program type 
dictated by 
resource need 

Part of IRP 
requirement- 
may be combined 
with other models 

RFP model 
for full-scale 
programs and 
congestion relief 

Varies 

No 

Utility buys from 
third party 

Integrated - can 
be T&D only 

Program type 
dictated by 
resource need 

Connecticut and 

Con Edison going 
out to bid to reduce 
congestion 

Portfolio standard 
model (can be 
combined with 

SBC or IRP): 

• Nevada 

• California 

• Connecticut 

• Texas 

Varies 

Varies 

Utility may 
implement 
programs or 
buy to meet 
standard 

Standard portfolio 

Programs for all 
customer classes 

Generally used 
in states with 
existing programs 
to increase program 
activity 

Municipal 
utility & electric 
cooperative: 

• Sacramento 
Municipal Utility 
District (CA) 

• City of Austin (TX) 

• Great River Energy 
(MN) 

In rates 

No 

Utility 

Depends on 
whether utility 
owns generation 

Programs for all 
customer classes 

Based on customer 
and resource needs; 
can be similar to IRP 
model 


i A shareholder incentive is a financial incentive to a utility (above those that would normally be recovered in a rate case) for achieving set goals for 
energy efficiency program performance. 



6-4 National Action Plan for Energy Efficiency 

























Key Findings 

Overviews of the energy efficiency programs reviewed 

for this chapter are provided in Table 6-2 and 6-3. Key 

findings drawn from these programs include: 

• Energy efficiency resources are being acquired on aver¬ 
age at about one-half the cost of the typical new 
power sources, and about one-third of the cost of nat¬ 
ural gas supply in many cases—and contribute to an 
overall lower cost energy system for rate-payers (EIA, 
2006). 

• Many energy efficiency programs are being delivered at 
a total program cost of about $0.02 to $0.03 per life¬ 
time kilowatt-hour (kWh) saved and $0.30 to $2.00 
per lifetime million British thermal units (MMBtu) 
saved. These costs are less than the avoided costs seen 
in most regions of the country. Funding for the majority 
of programs reviewed ranges from about 1 to 3 per¬ 
cent of electric utility revenue and 0.5 to 1 percent of 
gas utility revenue. 

• Even low energy cost states, such as those in the Pacific 
Northwest, have reason to invest in energy efficiency, 
as energy efficiency provides a low-cost, reliable 
resource that reduces customer utility bills. Energy effi¬ 
ciency also costs less than constructing new genera¬ 
tion, and provides a hedge against market, fuel, and 
environmental risks (Northwest Power and Conservation 
Council, 2005). 

•Well-designed programs provide opportunities for cus¬ 
tomers of all types to adopt energy savings measures 
and reduce their energy bills. These programs can help 
customers make sound energy use decisions, increase 
control over their energy bills, and empower them to 
manage their energy usage. Customers can experience 
significant savings depending on their own habits and 
the program offered. 

•Consistently funded, well-designed efficiency programs 
are cutting electricity and natural gas load—providing 
annual savings for a given program year of 0.15 to 1 


percent of energy sales. These savings typically will 
accrue at this level for 10 to 15 years. These programs 
are helping to offset 20 to 50 percent of expected 
energy growth in some regions without compromising 
end-user activity or economic well being. 

• Research and development enables a continuing source 
of new technologies and methods for improving energy 
efficiency and helping customers control their 
energy bills. 

• Many state and regional studies have found that pur¬ 
suing economically attractive, but as yet untapped 
energy efficiency could yield more than 20 percent sav¬ 
ings in total electricity demand nationwide by 2025. 
These savings could help cut load growth by half or 
more, compared to current forecasts. Savings in direct 
use of natural gas could similarly provide a 50 percent 
or greater reduction in natural gas demand growth. 
Potential varies by customer segment, but there are 
cost-effective opportunities for all customer classes. 

• Energy efficiency programs are being operated success¬ 
fully across many different contexts: regulated and 
unregulated markets; utility, state, or third-party 
administration; investor-owned, public, and coopera¬ 
tives; and gas and electric utilities. 

• Energy efficiency resources are being acquired through 
a variety of mechanisms including system benefits 
charges (SBCs), energy efficiency portfolio standards 
(EEPSs), and resource planning (or cost of service) 
efforts. 

• Cost-effective energy efficiency programs for electricity 
and natural gas can be specifically targeted to reduce 
peak load. 

• Effective models are available for delivering gas and 
electric energy efficiency programs to all customer classes. 
Models may vary based on whether a utility is in the ini¬ 
tial stages of energy efficiency programming, or has 
been implementing programs for a number of years. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-5 






Table 6-2. Efficiency Measures of Natural Gas Savings Programs 


Program Administrator 

Keyspan 

Vermont Gas 

(VT) 

SoCal Gas 

(CA) 

(MA) 

Policy Model 

Gas 

Gas 

Gas 

Period 

2004 

2004 

2004 

Program Funding 

Average Annual Budget ($MM) 

12 

1.1 

21 

% of Gas Revenue 

1.00% 

1.60% 

0.53% 

Benefits 

Annual MMBtu Saved 1 (000s MMBtu) 

500 

60 

1,200 

Lifetime MMBtu Saved 2 (000s MMBtu) 

6,000 

700 

15,200 

Cost-Effectiveness 

Cost of Energy Efficiency ($/lifetime MMBtu) 

2 

2 

1 

Retail Gas Prices ($/thousand cubic feet [Mcf]) 

11 

9 

8 

Cost of Energy Efficiency (% Avoided Energy Cost) 

19% 

18% 

18% 

Total Avoided Cost (2005 $/MMBtu) 3 

12 

11 

7 

1 SWEEP, 2006; Southern California Gas Company, 2004. 


2 Lifetime MMBtu calculated as 12 times annual MMBtu saved where not reported (not reported for Keyspan or Vermont Gas). 

3 VT and MA avoided cost (therms) represents all residential (not wholesale) cost considerations (ICF Consulting, 2005). 


• Energy efficiency programs, projects, and policies ben¬ 
efit from established and stable regulations, clear 
goals, and comprehensive evaluation. 

• Energy efficiency programs benefit from committed 
program administrators and oversight authorities, as 
well as strong stakeholder support. 

• Most large-scale programs have improved productivity, 
enabling job growth in the commercial and industrial sectors. 

• Large-scale energy efficiency programs can reduce 
wholesale market prices. 

Lessons learned from the energy efficiency programs 
operated since inception of utility programs in the late 
1980s are presented as follows, and cover key aspects of 
energy efficiency program planning, design, implemen¬ 
tation, and evaluation. 


Summary of Best Practices 

In this chapter, best practice strategies are organized and 
explained under four major groupings: 

• Making Energy Efficiency a Resource 

• Developing an Energy Efficiency Plan 
•Designing and Delivering Energy Efficiency Programs 

• Ensuring Energy Efficiency Investments Deliver Results 

For the most part, the best practices are independent of 
the policy model in which the programs operate. Where 
policy context is important, it is discussed in relevant sec¬ 
tions of this chapter. 


6-6 National Action Plan for Energy Efficiency 


































■ 


Making Energy Efficiency a Resource 

Energy efficiency is a resource that can be acquired to 
help utilities meet current and future energy demand. To 
realize this potential requires leadership at multiple levels, 
organizational alignment, and an understanding of the 
nature and extent of the energy efficiency resource. 

•Leadership at multiple levels is needed to establish the 
business case for energy efficiency, educate key stake¬ 
holders, and enact policy changes that increase invest¬ 
ment in energy efficiency as a resource. Sustained 
leadership is needed from: 

Key individuals in upper management at the utility 
who understand that energy efficiency is a resource 
alternative that can help manage risk, minimize long¬ 
term costs, and satisfy customers. 

— State agencies, regulatory commissions, local govern¬ 
ments and associated legislative bodies, and/or consumer 
advocates that expect to see energy efficiency considered 
as part of comprehensive utility management. 

— Businesses that value energy efficiency as a way to 
improve operations, manage energy costs, and con¬ 
tribute to long-term energy price stability and availabili¬ 
ty, as well as trade associations and businesses, such as 
Energy Service Companies (ESCOs), that help members 
and customers achieve improved energy performance. 

— Public interest groups that understand that in order 
to achieve energy efficiency and environmental 
objectives, they must help educate key stakeholders 
and find workable solutions to some of the financial 
challenges that limit acceptance and investment in 
energy efficiency by utilities . 3 

• Organizational alignment With policies in place to sup¬ 
port energy efficiency programming, organizations need 
to institutionalize policies to ensure that energy efficiency 
goals are realized. Factors contributing to success include: 


— Strong support from upper management and one or 
more internal champions. 

A framework appropriate to the organization that 
supports large-scale implementation of energy effi¬ 
ciency programs. 

Clear, well-communicated program goals that are tied 
to organizational goals and possibly compensation. 

— Adequate staff resources to get the job done. 

— A commitment to continually improve business 
processes. 

• Understanding of the efficiency resource is necessary 
to create a credible business case for energy efficiency. 
Best practices include the following: 

— Conduct a "potential study" prior to starting programs 
to inform and shape program and portfolio design. 

— Outline what can be accomplished at what costs. 

— Review measures for all customer classes including 
those appropriate for hard-to-reach customers, such 
as low income and very small business customers. 

Developing an Energy Efficiency Plan 

An energy efficiency plan should reflect a long-term per¬ 
spective that accounts for customer needs, program 
cost-effectiveness, the interaction of programs with 
other policies that increase energy efficiency, the oppor¬ 
tunities for new technology, and the importance of 
addressing multiple system needs including peak load 
reduction and congestion relief. Best practices include 
the following: 

• Offer programs for all key customer classes. 

• Align goals with funding. 


3 Public interest groups include environmental organizations such as the National Resources Defense Council (NRDC), Alliance to Save Energy (ASE), and 
American Council for an Energy Efficient Economy (ACEEE) and regional market transformation entities such as the Northeast Energy Efficiency 
Partnerships (NEEP), Southwest Energy Efficiency Project (SWEEP), and Midwest Energy Efficiency Alliance (MEEA). 


To create a sustainable, aggressive national commitment to energy efficiency 


6-7 




Table 6-3. Efficiency Measures of Electric and Combination Programs | 


NYSERDA 

(NY) 

Efficiency 

Vermont 

(VT) 

MA Utilities 
(MA) 

Wl Department 
of 

Administration 12 

V 

CA Utilities 
(CA) 

Policy Model 

SBC w/State Admin 

SBC w/3 rd Party Admin 

SBC w/Utility Admin 

SBC w/State Admin 

SBC w/Utility Admin 
& Portfolio Standard 

- 

Period 

2005 

2004 

2002 

2005 

2004 

Program Funding 

Spending on Electric Energy 

Efficiency ($MM) i 

138 

14 

123 

63 

317 

Budget as % of Electric Revenue 2 

1.3% 

3.3% 

3.0% 

1.4% 

1.5% 

Avg Annual Budget Gas ($MM) 

NR io 

N/A 

3 ii 

N/A 

N/A 

% of Gas Revenue 

NR io 

N/A 

N/A 

N/A 

N/A 

Benefits 

Annual MWh Saved / MWh Sales 3 4 

0.2% 

0.9% 

0.4% 

0.1% 

1.0% 

Lifetime MWh Saved 5 (000s MWh) 

6,216 

700 

3,428 

1,170 

22,130 

Annual MW Reduction 

172 

15 

48 

81 

377 

Lifetime MMBtu Saved 5 (000s MMBtu) 

17,124 

470 

850 

11,130 

43,410 

Annual MMBtu Saved (000s MMBtu) 

1,427 

40 

70 

930 

3,620 

Non-Energy Benefits 

$79M bill 
reduction 

37,200 CCF of water 

$21M bill 
reduction 

2,090 new jobs 
created 

Value of 

non-energy benefits: 
Residential: $6M 

C/I: $36M 

NR 

Avoided Emissions (tons/yr for 1 
program year) 

(could include benefits from load response, 
renewable, and DG programs) 

N0 X : 470 

S0 2 : 850 

C0 2 : 400,000 

Unspecified pollutants: 
460,000 over 
lifetime 

N0 X : 135 

S0 2 : 395 

C0 2 :161,205 

N0 X : 2,167 

S0 2 : 4,270 

C0 2 : 977,836 

(annual savings from 5 
program years) 

NR 

1 Cost-Effectiveness 

Cost of Energy Efficiency 


S/lifetime (kWh) 6 

0.02 

0.02 

0.03 

0.05 

0.01 

$/lifetime (MMBtu) 

N/A 

N/A 

0.32 

N/A 

N/A 

Retail Electricity Prices (S/kWh) 

0.13 

0.11 

0.11 

0.07 

0.13 

Retail Gas Prices ($/Mcf) 

N/A 

N/A 

NR 

N/A 

N/A 

Avoided Costs (2005$) 7 8 


Energy ($/kWh) 

0.03 

0.07 

0.07 

0.02 to 0.06 13 

0.06 

Capacity ($/kW) 9 

28.20 

3.62 

6.64 



On-Peak Energy ($/kWh) 



0.08 



Off-Peak Energy ($/kWh) 



0.06 



Cost of Energy Efficiency as % Avoided 
Energy Cost 

89% 

29% 

10% 

90% 

23% 

CCF = one hundred cubic feet; C/I = commercial and industrial; C0 2 = carbon dioxide; DG = distributed generation; kWh = kilowatt-hour; 

Mcf = one thousand cubic feet; $MM = million dollars; MMBtu = million British thermal units; MW = megawatt; MWh = megawatt-hour; 

N/A = not applicable; NO x = nitrogen oxides; NR = not reported; S0 2 = sulfur dioxide. 

1 NYSERDA 2005 spending derived from subtracting cumulative 2004 spending from cumulative 2005 spending; includes demand response and 
research and development (R&D). 

2 ACEEE, 2004; Seattle City Light, 2005. 

3 Annual MWh saved averaged over program periods for Wisconsin and California Utilities. NYSERDA 2005 energy efficiency savings derived from 
subtracting cumulative 2004 savings from 2005 cumulative reported savings. 

4 EIA, 2006; Austin Energy, 2004; Seattle City Light, 2005. Total sales for California Utilities in 2003 and SMUD in 2004 were derived based on 
growth in total California retail sales as reported by EIA. 

s Lifetime MWh savings based on 12 years effective life of installed equipment where not reported for NYSERDA, Wisconsin, Nevada, SMUD, BPA, 
and Minnesota. Lifetime MMBtu savings based on 12 years effective life of installed equipment. 

6-8 National Action Plan for Energy Efficiency 










































































Table 6-3. Efficiency Measures of Electric and Combination Programs (continued) 


Nevada 

CT Utilities 
(CT) 

SMUD 

(CA) 

Seattle City 
Light (WA) 

Austin Energy 

Bonneville Power 
Administration 
(ID, MT, OR, WA) 

MN Electric and 

Gas Investor-Owned 
Utilities (MN) 

IRP with 
Portfolio 
Standard 

SBC w/Utility Admin 
& Portfolio Standard 

Municipal 

Utility 

Municipal Utility 

Municipal Utility 

Regional Planning 

IRP and Conservation 
Improvement Program 

2003 

2005 

2004 

2004 

2005 

2004 

2003 

Program Funding 

11 

65 

30 

20 

25 

78 

52 

0.5% 

3.1% 

1.5% 

3.4% 

1.9% 

NR 

NR 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

$14 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

0.5% 

I Benefits 

0.1% 

1.0% 

0.5% 

0.7% 

0.9% 


0.5% 

420 

4,400 

630 

1,000 

930 

3,080 

3,940 

16 

135 

14 

7 

50 

47.2 

129 

N/A 

N/A 

N/A 

N/A 

10,777 

N/A 

22,010 

N/A 

N/A 

N/A 

N/A 

1,268 

N/A 

1,830 

NR 

Lifetime savings of 
$550M on bills 

NR 

Lifetime savings of 
$430M on bills 
created 

Potentially over 900 
jobs created 
Residential: $6M 
C/I: $36M 

NR 

NR 

NR 

NO x : 334 

S0 2 :123 

C0 2 :198,586 

o 

X 

00 

C0 2 : 353,100 
(cummulative 
annual savings for 

13 years) 

NO x : 640 

S0 2 :104 

C0 2 : 680,000 
over lifetime 

NR 

NR 

I Cost-Effectiveness 



0.03 

0.01 

0.03 

0.02 

0.03 

0.03 

0.01 

N/A 

N/A 

N/A 

N/A 

2.32 

N/A 

0.06 

0.09 

0.10 

0.10 

0.06 

0.12 

Wholesaler - N/A 

0.06 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

5.80 




0.07 


NR 

NR 

Wholesaler - N/A 

NR 

36.06 

20.33 








0.08 







0.06 





Not calculated 

21% 

63% 


Not calculated 

Not calculated 

Not calculated 


6 Calculated for all cases except SMUD; SMUD data provided by J. Parks, Manager, Energy Efficiency and Customer R&D, Sacramento Municipal 
Utility District (personal communication. May 19, 2006). 

7 Avoided cost reported as a consumption ($/kWh) not a demand (kW) figure. 

8 Total NSTAR avoided cost for 2006. 

9 Avoided capacity reported by NYSERDA as the three-year averaged hourly wholesale bid price per MWh. 

10 NYSERDA does not separately track gas-related project budget, revenue, or benefits. 

11 NSTAR Gas only. 

12 Wisconsin has a portfolio that includes renewable distributed generation; some comparisons might not be appropriate. 

13 Range based on credits given for renewable distributed generation. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-9 











































































• Use cost-effectiveness tests that are consistent with 
long-term planning. 

• Consider building codes and appliance standards when 
designing programs. 

• Plan to incorporate new technologies. 

• Consider efficiency investments to alleviate transmis¬ 
sion and distribution constraints. 

•Create a roadmap of key program components, 
milestones, and explicit energy use reduction goals. 

Designing and Delivering Energy Efficiency Programs 

Program administrators can reduce the time to market 
and implement programs and increase cost-effectiveness 
by leveraging the wealth of knowledge and experience 
gained by other program administrators throughout the 
nation and working with industry to deliver energy effi¬ 
ciency to market. Best practices include the following: 

• Begin with the market in mind. 

— Conduct a market assessment. 

— Solicit stakeholder input. 

— Listen to customer and trade ally needs. 

— Use utility channels and brands. 

— Promote both energy and non-energy (e.g., 
improved comfort, improved air quality) benefits of 
energy efficient products and practices to customers. 

— Coordinate with other utilities and third-party pro¬ 
gram administrators. 

— Leverage the national ENERGY STAR program. 

— Keep participation simple. 


Keep funding (and other program characteristics) as/ 
consistent as possible. 

Invest in education, training, and outreach. 

Leverage customer contact to sell additional efficien- 
cy and conservation. 

• Leverage private sector expertise, external funding, 
and financing. 

— Leverage manufacturer and retailer resources 
through cooperative promotions. 

— Leverage state and federal tax credits and other tax 
incentives (e.g., accelerated depreciation, first-year 
expensing, sales tax holidays) where available. 

— Build on ESCO and other financing program options. 

— Consider outsourcing some programs to private and 
not-for-profit organizations that specialize in 
program design and implementation through a 
competitive bidding process. 

•Start with demonstrated program models—build 
infrastructure for the future. 

— Start with successful program approaches from 
other utilities and program administrators and adapt 
them to local conditions to accelerate program 
design and effective implementation. 

— Determine the right incentives, and if incentives are finan¬ 
cial, make sure that they are set at appropriate levels. 

— Invest in educating and training the service industry 
(e.g., home performance contractors, heating and cool¬ 
ing technicians) to deliver increasingly sophisticated 
energy efficiency services. 

— Evolve to more comprehensive programs. 


6-10 National Action Plan for Energy Efficiency 










Change measures over time to adapt to changing 
markets and new technologies. 

— Pilot test new program concepts. 

Ensuring Energy Efficiency Investments Deliver Results 
Program evaluation helps optimize program efficiency 
and ensure that energy efficiency programs deliver 
intended results. Best practices include the following: 

• Budget, plan and initiate evaluation from the 
onset; formalize and document evaluation plans 
and processes. 

•Develop program and project tracking systems that 
support evaluation and program implementation 
needs. 

• Conduct process evaluations to ensure that programs 
are working efficiently. 

• Conduct impact evaluations to ensure that mid- and 
long-term goals are being met. 

• Communicate evaluation results to key stakeholders. 
Include case studies to make success more tangible. 

Making Energy Efficiency a Resource 

Energy efficiency programs are being successfully operated 
across many different contexts including electric and gas 
utilities; regulated and unregulated markets; utility, state, 
and third-party administrators; and investor-owned, pub¬ 
lic, and cooperatively owned utilities. These programs are 
reducing annual energy use by 0.15 to 1 percent at spend¬ 
ing levels between 1 and 3 percent of electric, and 0.5 and 
1.5 percent of gas revenues—and are poised to deliver 
substantially greater reductions over time. These organi¬ 
zations were able to make broader use of the energy 
efficiency resource in their portfolio by having: 

• Leadership at multiple levels to enact policy change. 

• Organizational alignment to ensure that efficiency 
goals are realized. 


• A well-informed understanding of the efficiency 
resource including, the potential for savings and the 
technologies for achieving them. 

Examples of leadership, organizational alignment, and 
the steps that organizations have taken to understand 
the nature and extent of the efficiency resource are 
provided in the next sections. 

Leadership 

Many energy efficiency programs reviewed in this chapter 
began in the integrated resource plan (IRP) era of the 
electric utilities of the 1980s. As restructuring started in 
the late 1990s, some programs were suspended or halted. 
In some cases (such as California, New York, 
Massachusetts, Connecticut, and Rhode Island), however, 
settlement agreements were reached that allowed 
restructuring legislation to move forward if energy effi¬ 
ciency programming was provided through the distribu¬ 
tion utility or other third-party providers. In many cases, 
environmental advocates, energy service providers, and 
state agencies played active roles in the settlement 
process to ensure energy efficiency was part of the 
restructured electric utility industry. Other states (such as 
Minnesota, Wisconsin, and Vermont) developed legisla¬ 
tion to address the need for stable energy efficiency pro¬ 
gramming without restructuring their state electricity 
markets. In addition, a few states (including California, 
Minnesota, New Jersey, Oregon, Vermont, and 
Wisconsin) enacted regulatory requirements for utilities 
or other parties to provide gas energy efficiency pro¬ 
grams (Kushler, et al., 2003). Over the past few years, 
the mountain states have steadily ramped up energy 
efficiency programs. 

In all cases, to establish energy efficiency as a resource 
required leadership at multiple levels: 

• Leadership is needed to establish the business case for 
energy efficiency, educate key stakeholders, and enact 
policy changes that increase investment in energy 
efficiency as a resource. Sustained leadership is 
needed from: 


To create a sustainable, aggressive national commitment to energy efficiency 


6-11 







Key individuals in upper management at the utility 
who understand that energy efficiency is a resource 
alternative that can help manage risk, minimize long¬ 
term costs, and satisfy customers. 

State agencies, regulatory commissions, local gov¬ 
ernments and associated legislative bodies, and/or 
consumer advocates that expect to see energy efficien¬ 
cy considered as part of comprehensive utility manage¬ 
ment. 

— Businesses that value energy efficiency as a way to 
improve operations, manage energy costs, and con¬ 
tribute to long-term energy price stability and avail¬ 
ability, as well as trade associations and businesses, 
such as ESCOs, that help members and customers 
achieve improved energy performance. 

-Public interest groups that understand that in order to 
achieve energy efficiency and environmental objectives, 
they must help educate key stakeholders and find work¬ 
able solutions to some of the financial challenges that limit 
acceptance and investment in energy efficiency by utilities. 

The following are examples of how leadership has resulted 

in increased investment in energy efficiency: 

• In Massachusetts, energy efficiency was an early con¬ 
sideration as restructuring legislation was discussed. 
The Massachusetts Department of Public Utilities 
issued an order in D.P.U. 95-30 establishing principles 
to "establish the essential underpinnings of an electric 
industry structure and regulatory framework designed 
to minimize long-term costs to customers while main¬ 
taining safe and reliable electric service with minimum 
impact on the environment." Maintaining demand side 
management (DSM) programs was one of the 
major principles the department identified during 
the transition to a restructured electric industry. 
The Conservation Law Foundation, the Massachusetts 
Energy Efficiency Council, the National Consumer Law 
Center, the Division of Energy Resources, the Union of 
Concerned Scientists, and others took leadership roles 
in ensuring energy efficiency was part of a restructured 
industry (MDTE, 1995). 


• Leadership at multiple levels led to significantly 
expanded programming of Nevada's energy efficiency 
program, from about $2 million in 2001 to an estimated 
$26 million to $33 million in 2006: 

"There are 'champions' for expanded energy efficiency 
efforts in Nevada, either in the state energy office or in 
the consumer advocate's office. Also, there have been 
very supportive individuals in key positions within the 
Nevada utilities. These individuals are committed to 
developing and implementing effective DSM programs, 
along with a supportive policy framework" 
(SWEEP, 2006). 

Public interest organizations, including SWEEP, also 
played an important role by promoting a supportive pol¬ 
icy framework (see box on page 6-13, "Case Study: 
Nevada Efficiency Program Expansion" for additional 
information). 

• Fort Collins City Council (Colorado) provides an example 
of local leadership. The council adopted the Electric 
Energy Supply Policy in March 2003. The Energy Policy 
includes specific goals for city-wide energy consump¬ 
tion reduction (10 percent per capita reduction by 
2012) and peak demand reduction (15 percent per 
capita by 2012). Fort Collins Utilities introduced a variety 
of new demand-side management (DSM) programs 
and services in the last several years in pursuit of the 
energy policy objectives. 

•Governor Huntsman's comprehensive policy on energy 
efficiency for the state of Utah, which was unveiled in 
April 2006, is one of the most recent examples of lead¬ 
ership. The policy sets a goal of increasing the state's 
energy efficiency by 20 percent by the year 2015. One 
key strategy of the policy is to collaborate with utilities, 
regulators, and the private sector to expand energy 
efficiency programs, working to identify and remove 
barriers, and assisting the utilities in ensuring that 
efficiency programs are effective, attainable, and feasible 
to implement. 


6-12 National Action Plan for Energy Efficiency 
















Organizational Alignment 

Once policies and processes are in place to spearhead 
increased investment in energy efficiency, organizations 
often institutionalize these policies to ensure that goals 
are realized. The most successful energy efficiency pro¬ 
grams by utilities or third-party program administrators 
share a number of attributes. They include: 

•Clear support from upper management and one or 
more internal champions. 

• Clear, well-communicated program goals that are tied to 
organizational goals and, in some cases, compensation. 

• A framework appropriate to the organization that sup¬ 
ports large-scale implementation of energy efficiency 
programs. 


• Adequate staff resources to get the job done. 

• Strong regulatory support and policies. 

• A commitment to continually improve business processes. 

"Support of upper management is critical to program 
success" (Komor, 2005). In fact, it can make or break a 
program. If the CEO of a company or the lead of an 
agency is an internal champion for energy efficiency, it 
will be truly a part of how a utility or agency does busi¬ 
ness. Internal champions below the CEO or agency level 
are critical as well. These internal champions motivate 
their fellow employees and embody energy efficiency as 
part of the corporate culture. 


Case Study: Nevada Efficiency Program Expansion 


Nevada investor-owned utilities (lOUs), Nevada Power, and 
Sierra Pacific Power Company phased-out DSM programs 
in the mid-1990s. After 2001, when the legislature 
refined the state's retail electric restructuring law to permit 
only large customers (>1 megawatt [MW]) to purchase 
power competitively, utilities returned to a vertically 
integrated structure and DSM programs were restarted, but 
with a budget of only about $2 million that year. 

As part of a 2001 IRP proceeding, a collaborative process 
was established for developing and analyzing a wider 
range of DSM program options. All parties reached an 
agreement to the IRP proceeding calling for $11.2 million 
per year in utility-funded DSM programs with an emphasis 
on peak load reduction but also significant energy sav¬ 
ings. New programs were launched in March 2003. 

In 2004, the Nevada public utilities commission also 
approved a new policy concerning DSM cost recovery, 
allowing the utilities to earn their approved rate of return 
plus 5 percent (e.g., a 15 percent return if the approved 
rate is 10 percent) on the equity-portion of their DSM 
program funding. This step gave the utilities a much 
greater financial incentive to expand their DSM programs. 


In June 2005, legislation enacted in Nevada added energy 
savings from DSM programs to the state's Renewable 
Portfolio Standard. This innovative policy allows energy 
savings from utility DSM programs and efficiency meas¬ 
ures acquired through contract to supply up to 25 percent 
of the requirements under the renamed clean energy 
portfolio standard. The clean energy standard is equal to 
6 percent of electricity supply in 2005 and 2006 and 
increases to 9 percent in 2007 and 2008, 12 percent from 
2009 to 2010, 15 percent in 2011 and 2012, 18 percent 
in 2013 and 2014, and 20 percent in 2015 and there¬ 
after. At least half of the energy savings credits must 
come from electricity savings in the residential sector. 

Within months of passage, the utilities proposed a large 
expansion of DSM programs for 2006. In addition to the 
existing estimated funding of $26 million, the Nevada util¬ 
ities proposed adding another $7.5 million to 2006 DSM 
programs. If funding is approved, the Nevada utilities esti¬ 
mate the 2006 programs alone will yield gross energy sav¬ 
ings of 153 gigawatt-hours/yr and 63 MW (Larry Holmes, 
personal communication, February 28, 2006). 

Source: Geller, 2006. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-13 



Tying energy efficiency to overall corporate goals and 
compensation is important, particularly when the utility is 
the administrator of energy efficiency programs. Ties to 
corporate goals make energy efficiency an integral part of 
how the organization does business as exemplified below: 

• Bonneville Power Administration (BPA) includes energy 
efficiency as a part of its overall corporate strategy, and 
its executive compensation is designed to reflect how 
well the organization meets its efficiency goals. BPA's 
strategy map states, "Development of all cost-effective 
energy efficiency in the loads BPA serves facilitates 
development of regional renewable resources, and 
adopts cost-effective non-construction alternatives to 
transmission expansion" (BPA, 2004). 

• National Grid ties energy efficiency goals to staff and 
executive compensation (P. Arons, personnel communi¬ 
cation, June 15, 2006). 

• Sacramento Municipal Utility District (SMUD) ties energy 
efficiency to its reliability goal: "To ensure a reliable energy 
supply for customers in 2005, the 2005 budget includes 
sufficient capacity reserves for the peak summer season. 
We have funded all of the District's commercial and resi¬ 
dential load management programs, and on-going effi¬ 
ciency programs in Public Good to continue to contribute 
to peak load reduction" (SMUD, 2004a). 

•Nevada Power's Conservation Department had a 
"Performance Dashboard" that tracks costs, participating 
customers, kWh savings, kW savings, $/kWh, $/kW, 
customer contribution to savings, and total customer 
costs on a real time basis, both by program and overall. 

•Austin Energy's Mission Statement is "to deliver clean, 
affordable, reliable energy and excellent customer serv¬ 
ices" (Austin Energy, 2004). 

•Seattle City Light has actively pursued conservation as 
an alternative to new generation since 1977 and has 
tracked progress toward its goals (Seattle City Light, 
2005). Its longstanding, resolute policy direction estab¬ 
lishes energy conservation as the first choice resource. 
In more recent years, the utility has also been guided by 
the city's policy to meet of all the utility's future load 
growth with conservation and renewable resources 
(Steve Lush, personal communication, June 2006). 


From Pacific Gas and Electric's (PG&E's) 
Second Annual Corporate Responsibility 
Report (2004): 

"One of the areas on which PG&E puts a lot of 
emphasis is helping our customers use energy 
more efficiently." 

"For example, we plan to invest more than $2 
billion on energy efficiency initiatives over the 
next 10 years. What's exciting is that the most 
recent regulatory approval we received on this 
was the result of collaboration by a large and 
broad group of parties, including manufacturers, 
customer groups, environmental groups, and the 
state's utilities." 

— Beverly Alexander, Vice President, 

Customer Satisfaction, PG&E 

Having an appropriate framework within the organiza¬ 
tion to ensure success is also important. In the case of 
the utility, this would include the regulatory framework 
that supports the programs, including cost recovery and 
potentially shareholder incentives and/or decoupling. For 
a third-party administrator, an appropriate framework 
might include a sound bidding process by a state agency 
to select the vendor or vendors and an appropriate reg¬ 
ulatory arrangement with the utilities to manage the 
funding process. 

Adequate resources also are critical to successful imple¬ 
mentation of programs. Energy efficiency programs 
need to be understood and supported by departments 
outside those that are immediately responsible for pro¬ 
gram delivery. If information technology, legal, power 
supply, transmission, distribution, and other depart¬ 
ments do not share and support the energy efficiency 
goals and programs, it is difficult for energy efficiency 
programs to succeed. When programs are initiated, the 
need for support from other departments is greatest. 
Support from other departments needs to be considered 
in planning and budgeting processes. 


6-14 National Action Plan for Energy Efficiency 










As noted in the Nevada case study, having a shareholder 
incentive makes it easier for a utility to integrate effi¬ 
ciency goals into its business because the incentive off¬ 
sets some of the concerns related to financial treatment 
of program expenses and potential lost revenue from 
decreased sales. For third-party program administrators, 
goals might be built into the contract that governs the 
overall implementation of the programs. For example, 
Efficiency Vermont's contract with the Vermont 
Department of Public Service Board has specific per¬ 
formance targets. An added shareholder return will not 
motivate publicly and cooperatively owned utilities, 
though they might appreciate reduced risks from expo¬ 
sure to wholesale markets, and the value added in 
improved customer service. SMUD, for example, cites 
conservation programs as a way to help customers 
lower their utility bills (SMUD, 2004b). These compa¬ 
nies, like lOUs, can link employee compensation to 
achieving energy efficiency targets. 

Business processes for delivering energy efficiency pro¬ 
grams and services to customers should be developed 
and treated like other business processes in an organiza¬ 
tion and reviewed on a regular basis. These processes 
should include documenting clear plans built on explicit 
assumptions, ongoing monitoring of results and plan 
inputs (assumptions), and regular reassessment to 
improve performance (using improved performance 
itself as a metric). 

Understanding the Efficiency Resource 

Energy efficiency potential studies provide the initial jus¬ 
tification (the business case) for utilities embarking on or 
expanding energy efficiency programs, by providing 
information on (1) the overall potential for energy effi¬ 
ciency and (2) the technologies, practices, and sectors 
with the greatest or most cost-effective opportunities for 
achieving that potential. Potential studies illuminate the 
nature of energy efficiency resource, and can be used by 
legislators and regulators to inform efficiency policy and 
programs. Potential studies can usually be completed in 
three to eight months, depending on the level of detail, 
availability of data, and complexity. They range in cost 


from $100,000 to $300,000 (exclusive of primary data 
collection). Increasingly, many existing studies can be 
drawn from to limit the extent and cost of such an effort. 

The majority of organizations reviewed in developing this 
chapter have conducted potential studies in the past five 
years. In addition, numerous other studies have been con¬ 
ducted in recent years by a variety of organizations inter¬ 
ested in learning more about the efficiency resource in 
their state or region. Table 6-4 summarizes key findings for 
achievable potential (i.e., what can realistically be 
achieved from programs within identified funding param¬ 
eters), by customer class, from a selection of these studies. 
It also illustrates that this potential is well represented 
across the residential, commercial, and industrial sectors. 
The achievable estimates presented are for a future time 
period, are based on realistic program scenarios, and rep¬ 
resent potential program impacts above and beyond nat¬ 
urally occurring conservation. Energy efficiency potential 
studies are based on currently available technologies. New 
technologies such as those discussed in Table 6-9 will con¬ 
tinuously and significantly increase potential over time. 

The studies show that achievable potential for reducing 
overall energy consumption ranges from 7 to 32 percent 
for electricity and 5 to 19 percent for gas, and that 
demand for electricity and gas can be reduced by about 
0.5 to 2 percent per year. For context, national electricity 
consumption is projected to grow by 1.6 percent per 
year, and gas consumption is growing 0.7 percent per 
year (EIA, 2006a). 

The box on page 6-17, "Overview of a Well-Designed 
Potential Study" provides information on key elements 
of a potential study. Related best practices for efficiency 
programs administrators include: 

• Conducting a "potential study" prior to starting programs. 

• Outlining what can be accomplished at what cost. 

• Reviewing measures appropriate to all customer classes 
including those appropriate for hard-to-reach customers, 
such as low income and very small business customers. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-15 





-4. Achievable Energy Efficiency Potential From Recent Studies 





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6-16 


National Action Plan for Energy Efficiency 


















































Overview of a Well-Designed Potential Study 


Well-designed potential studies assess the following types 
of potential: 

Technical potential assumes the complete penetration of 
all energy-conservation measures that are considered 
technically feasible from an engineering perspective. 

Economic potential refers to the technical potential of 
those measures that are cost-effective, when compared to 
supply-side alternatives. The economic potential is very 
large because it is summing up the potential in existing 
equipment, without accounting for the time period during 
which the potential would be realized. 

Maximum achievable potential describes the economic 
potential that could be achieved over a given time period 
under the most aggressive program scenario. 

Achievable potential refers to energy saved as a result 
of specific program funding levels and incentives. These 
savings are above and beyond those that would occur 
naturally in the absence of any market intervention. 

Naturally occurring potential refers to energy saved as 
a result of normal market forces, that is, in the absence of 
any utility or governmental intervention. 


The output of technical and economic potential is the size 
of the energy efficiency resource in MW, MWh, MMBtu 
and other resources. The potential is built up from savings 
and cost data from hundreds of measures and is typically 
summarized by sector using detailed demographic infor¬ 
mation about the customer base and the base of appli¬ 
ances, building stock, and other characteristics of the 
relevant service area. 

After technical and economic potential is calculated, typi¬ 
cally the next phase of a well-designed potential study is 
to create program scenarios to estimate actual savings 
that could be generated by programs or other forms of 
intervention, such as changing building codes or 
appliance standards. 

Program scenarios developed to calculate achievable 
potential are based on modeling example programs and 
using market models to estimate the penetration of the 
program. Program scenarios require making assumptions 
about rebate or incentive levels, program staffing, and 
marketing efforts. 

Scenarios can also be developed for different price 
assumptions and load growth scenarios, as shown below 
in the figure of a sample benefit/cost output from a 
potential study conducted for the state of California. 


Benefits and Costs of Electric Energy 
Efficiency Savings, 2002-2011 


uo 

a 

o 

S 

cz 

CD 

=3 

03 

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CD 

CO 

CD 


$25 

$20 

$15 

$10 

$5 

$0 


□Total Benefits 

■ Non-Incentive Participant Costs 

□ Program Incentives 

□ Program Admin & Marketing 




~r 

Net Benefits: 

S5.5B 



Net Benefits: 
$8.6B 


Net 

Benefits: 
$11.9B ' 

■ 


Business-as-Usual Advanced Efficiency 


Max Efficiency 


Source: KEMA, 2002 


To create a sustainable, aggressive national commitment to energy efficiency 


6-17 










































• Ensuring that potential state and federal codes and stan¬ 
dards are modeled and included in evaluation scenarios 

• Developing scenarios for relevant time periods. 

In addition, an emerging best practice is to conduct 
uncertainty analysis on savings estimates, as well as 
other variables such as cost. 

With study results in hand, program administrators are 
well positioned to develop energy efficiency goals, iden¬ 
tify program measures and strategies, and determine 
funding requirements to deliver energy efficiency pro¬ 
grams to all customers. Information from a detailed 
potential study can also be used as the basis for calculating 
program cost-effectiveness and determining measures 
for inclusion during the program planning and design 
phase. Detailed potential studies can provide informa¬ 
tion to help determine which technologies are replaced 
most frequently and are therefore candidates to deliver 
early returns (e.g., an efficient light bulb), and how long 
the savings from various technologies persist and there¬ 
fore will continue to deliver energy savings. For example, 
an energy efficient light bulb might last six years, where¬ 
as an efficient residential boiler might last 20 years. 
(Additional information on measure savings and life¬ 
times can be found in Resources and Expertise, a forth¬ 
coming product of the Action Plan Leadership Group.) 

Developing an Energy Efficiency Plan 

The majority of organizations reviewed for this chapter 
are acquiring energy efficiency resources for about 
$0.03/lifetime kWh for electric programs and about 
$1.30 to $2.00 per lifetime MMBtu for gas program (as 
shown previously in Tables 6-1 and 6-2). In many cases, 
energy efficiency is being delivered at a cost that is sub¬ 
stantially less than the cost of new supply—on the order 
of half the cost of new supply. In addition, in all cases 
where information is available, the costs of saved energy 
are less than the avoided costs of energy. These organi¬ 
zations operate in diverse locations under different 
administrative and regulatory structures. They do, how¬ 


ever, share many similar best practices when it comes to 
program planning, including one or more of the following: 

• Provide programs for all key customer classes. ! t 

•Align goals with funding. 

• Use cost-effectiveness tests that are consistent with 
long-term planning. 

• Consider building codes and appliance standards when 
designing programs. 

• Plan for developing and incorporating new technology. 

• Consider efficiency investments to alleviate transmis¬ 
sion and distribution constraints. 

•Create a roadmap that documents key program com¬ 
ponents, milestones, and explicit energy reduction goals. 

Provide Programs for All Customer Classes 

One concern sometimes raised when funding energy 
efficiency programs is that all customers are required to 
contribute to energy efficiency programming, though 
not all customers will take advantage of programs once 
they are available, raising the issue that non-participants 
subsidize the efficiency upgrades of participants. 

While it is true that program participants receive the 
direct benefits that accrue from energy efficiency 
upgrades, all customer classes benefit from well- 
managed energy efficiency programs, regardless of 
whether or not they participate directly. For example, an 
evaluation of the New York State Energy Research and 
Development Authority's (NYSERDA's) program portfolio 
concluded that: "total cost savings for all customers, 
including non participating customers [in the New York 
Energy $mart Programs] is estimated to be $196 million 
for program activities through year-end 2003, increasing 
to $420 to $435 million at full implementation" (NYSER- 
DA, 2004). 


6-18 National Action Plan for Energy Efficiency 















In addition, particularly for programs that aim to accelerate 
market adoption of energy efficiency products or services, 
there is often program "spillover" to non-program 
participants. For example, an evaluation of National 
Grid's Energy Initiative, Design 2000plus, and other small 
commercial and industrial programs found energy 
efficient measures were installed by non-participants due 
to program influences on design professionals and 
vendors. The analysis indicated that "non-participant 
spillover from the programs amounted to 12,323,174 
kWh in the 2001 program year, which is approximately 
9.2 percent of the total savings produced in 2001 by the 
Design 2000plus and Energy Initiative programs 
combined" (National Grid, 2002). 

Furthermore, energy efficiency programming can help 
contribute to an overall lower cost system for all cus¬ 
tomers over the longer term by helping avoid the need 
to purchase energy, or the need to build new infrastruc¬ 
ture such as generation, transmission and distribution 
lines. For example: 

• The Northwest Power Planning and Conservation 
Council found in its Portfolio Analysis that strategies 
that included more conservation had the least cost and 
the least risk (measured in dollars) relative to strategies 
that included less conservation. The most aggressive 
conservation case had an expected system cost of $1.8 
billion lower and a risk factor of $2.5 billion less than 
the strategy with the least conservation (NPPC, 2005). 

• In its 2005 analysis of energy efficiency and renewable 
energy on natural gas consumption and price, ACEEE 
states, "It is important to note that while the direct 
benefits of energy efficiency investment flow to partic¬ 
ipating customers, the benefits of falling prices accrue 
to all customers." Based on their national scenario of 
cost-effective energy efficiency opportunities, ACEEE 
found that total costs for energy efficiency would be 
$8 billion, and would result in consumer benefits of 
$32 billion in 2010 (Elliot & Shipley, 2005). 


•Through cost-effective energy efficiency investments in 
2004, Vermonters reduced their annual electricity use 
by 58 million kWh. These savings, which are expected 
to continue each year for an average of 14 years, met 
44 percent of the growth in the state's energy needs in 
2004 while costing ratepayers just 2.8 cents per kWh. 
That cost is only 37 percent of the cost of generating, 
transmitting, and distributing power to Vermont’s 
homes and businesses (Efficiency Vermont, 2004). 

• The Massachusetts Division of Energy noted that 
cumulative impact on demand from energy efficiency 
measures installed from 1998 to 2002 (excluding 
reductions from one-time interruptible programs) was 
significant—reducing demand by 264 megawatt 
(MW). During the summer of 2002, a reduction of this 
magnitude meant avoiding the need to purchase $ 19.4 
million worth of electricity from the spot market 
(Massachusetts, 2004). 

Despite evidence that both program participants and 
non-participants can benefit from energy efficiency pro¬ 
gramming, it is a best practice to provide program 
opportunities for all customer classes and income levels. 
This approach is a best practice because, in most cases, 
funding for efficiency programs comes from all customer 
classes, and as mentioned above, program participants 
will receive both the indirect benefits of system-wide 
savings and reliability enhancements and the direct 
benefits of program participation. 

All program portfolios reviewed for this chapter include 
programs for all customer classes. Program administrators 
usually strive to align program funding with spending 
based on customer class contributions to funds. It is not 
uncommon, however, to have limited cross-subsidization 
for (1) low-income, agricultural, and other hard-to-reach 
customers; (2) situations where budgets limit achievable 
potential, and the most cost-effective energy efficiency 
savings are not aligned with customer class contributions 
to energy efficiency funding; and (3) situations where 
energy efficiency savings are targeted geographically 
based on system needs—for example, air conditioner 


To create a sustainable, aggressive national commitment to energy efficiency 


6-19 






turn-ins or greater new construction incentives that are 
targeted to curtail load growth in an area with a supply 
or transmission and distribution need. For programs tar¬ 
geting low-income or other hard-to-reach customers, it 
is not uncommon for them to be implemented with a 
lower benefit-cost threshold, as long as the overall energy 
efficiency program portfolio for each customer class (i.e., 
residential, commercial, and industrial) meets cost- 
effectiveness criteria. 

NYSERDA's program portfolio is a good example of pro¬ 
grams for all customer classes and segments (see Table 6-5). 


Table 6-5. NYSERDA 2004 Portfolio 


Sector 

Program 

% of Sector 
Budget 

Residential 

Small Homes 

23% 

Keep Cool 

19% 

ENERGY STAR Products 

20% 

Program Marketing 

16% 

Multifamily 

10% 

Awareness/Other 

12% 

Low Income 

Assisted Multifamily 

59% 

Assisted Home Performance 

17% 

Direct Install 

8% 

All Other 

16% 

Business 

Performance Contracting 

36% 

Peak Load Reduction 

12% 

Efficient Products 

9% 

New Construction 

23% 

Technical Assistance 

10% 

All Other 

10% 


Nevada Power/Sierra Pacific Power Company's portfolio 
provides another example with notable expansion of 
program investments in efficient air conditioning, ENERGY 
STAR appliances, refrigerator collection, and renewable 
energy investments within a one-year timeframe (see 
Table 6-6). 


Align Goals With Funding 

Regardless of program administrative structure and policy 
context, it is a best practice for organizations to align 
funding to explicit goals for energy efficiency over the 
near-term and long-term. How quickly an organization is 
able to ramp up programs to capture achievable poten¬ 
tial can vary based on organizational history of running 
DSM programs, and the sophistication of the market¬ 
place in which a utility operates (e.g., whether there is a 
network of home energy raters, ESCOs, or certified heating, 
ventilation, and air conditioning [HVAC] contractors). 

Utilities or third-party administrators should set long¬ 
term goals for energy efficiency designed to capture a 
significant percentage of the achievable potential energy 
savings identified through an energy efficiency potential 
study. Setting long-term goals is a best practice for 
administrators of energy efficiency program portfolios, 
regardless of policy models and whether they are an 
investor-owned or a municipal or cooperative utility, or a 
third-party program administrator. Examples of how 
long-term goals are set are provided as follows: 

• In states where the utility is responsible for integrated 
resource planning (the IRP Model), energy efficiency must 
be incorporated into the IRP. This process generally 
requires a long-term forecast of both spending and sav¬ 
ings for energy efficiency at an aggregated level that is 
consistent with the time horizon of the IRP—generally at 
least 10 years. Five- and ten-year goals can then be devel¬ 
oped based on the resource need. In states without an 
SBC, the budget for energy efficiency is usually a revenue 
requirement expense item, but can be a capital invest¬ 
ment or a combination of the two. (As discussed in 
Chapter 2: Utility Ratemaking & Revenue Requirements, 
capitalizing efficiency program investments rather than 
expensing them can reduce short-term rate impacts.) 

• Municipal or cooperative utilities that own generation 
typically set efficiency goals as part of a resource plan¬ 
ning process. The budget for energy efficiency is usually 
a revenue requirement expense item, a capital expendi¬ 
ture, or a combination of the two. 


6-20 National Action Plan for Energy Efficiency 




























Table 6-6. Nevada Resource Planning Programs 



2005 Budget 

2006 Budget 

Air Conditioning Load Management 

$3,450,000 

$3,600,000 

High-Efficiency Air Conditioning 

2,600,000 

15,625,000 

Commercial Incentives 

2,300,000 

2,800,000 

Low-Income Support 

1,361,000 

1,216,000 

Energy Education 

1,205,000 

1,243,000 

ENERGY STAR Appliances 

1,200,000 

2,050,000 

School Support 

850,000 

850,000 

Refrigerator Collection 

700,000 

1,915,000 

Commercial New Construction 

600,000 

600,000 

Other - Miscellaneous & Technology 

225,000 

725,000 

Total Nevada Resource Planning Programs 

$14,491,000 

$30,624,000 

SolarGenerations 

1,780,075 

7,220,000 

Company Renewable - PV 

1,000,000 

1,750,000 

California Program 

370,000 

563,000 

Sierra Natural Gas Programs 

— 

820,000 

Total All Programs 

$17,641,075 

$40,977,000 


• A resource portfolio standard is typically set at a per¬ 
centage of overall energy or demand, with program 
plans and budgets developed to achieve goals at the 
portfolio level. The original standard can be developed 
based on achievable potential from a potential study, 
or as a percentage of growth from a base year. 

•In most SBC models, the funding is determined by a 
small volumetric charge on each customer's utility bill. 
This charge is then used as a basis for determining the 
overall budget for energy efficiency programming- 
contributions by each customer class are used to inform 
the proportion of funds that should be targeted to each 
customer class. Annual goals are then based on these 
budgets and a given program portfolio. Over time, the 
goal of the program should be to capture a large per¬ 
centage of achievable potential. 


• In most gas programs, funding can be treated as an 
expense, in a capital budget, or a combination (as is 
the case in some of the electric examples shown previ¬ 
ously). Goals are based on the budget developed for 
the time period of the plan. 

Once actual program implementation starts, program 
experience is usually the best basis for developing future 
budgets and goals for individual program years. 

Use Cost-Effectiveness Tests That Are Consistent 
With Long-Term Planning 

All of the organizations reviewed for this chapter use 
cost-effectiveness tests to ensure that measures and pro¬ 
grams are consistent with valuing the benefits and costs 
of their efficiency investments relative to long-term 


----;--- 

To create a sustainable, aggressive national commitment to energy efficiency 




























supply options. Most of the organizations reviewed use 
either the total resource cost (TRC), societal, or program 
administrator test (utility test) to screen measures. None 
of the organizations reviewed for this chapter used the 
rate impact measure (RIM) test as a primary decision¬ 
making test. 5 The key cost-effectiveness tests are 
described as follows, per Swisher, et al. (1997), with key 
benefits and costs further illustrated in Table 6-7. 

• Total Resource Cost (TRC) Test. Compares the total 
costs and benefits of a program, including costs and 
benefits to the utility and the participant and the avoided 
costs of energy supply. 

•Societal Test. Similar to the TRC Test, but includes the 
effects of other societal benefits and costs such as envi¬ 
ronmental impacts, water savings, and national security. 

• Utility/Program Administrator Test. Assesses benefits 
and costs from the program administrator's perspective 
(e.g., benefits of avoided fuel and operating capacity 
costs compared to rebates and administrative costs). 

• Participant Test. Assesses benefits and costs from a par¬ 
ticipant's perspective (e.g., the reduction in customers' 
bills, incentives paid by the utility, and tax credits 
received as compared to out-of-pocket expenses such 
as costs of equipment purchase, operation, and main¬ 
tenance). 

• Rate Impact Measure (RIM). Assesses the effect of 
changes in revenues and operating costs caused by a 
program on customers' bills and rates. 

Another metric used for assessing cost-effectiveness is 
the cost of conserved energy, which is calculated in cents 
per kWh or dollars per thousand cubic feet (Mcf). This 
measure does not depend on a future projection of energy 
prices and is easy to calculate; however, it does not fully 
capture the future market price of energy. 


An overall energy efficiency portfolio should pass thej 
cost-effectiveness test(s) of the jurisdiction. In an IRP sit- 
uation, energy efficiency resources are compared to new 
supply-side options-essentially the program administra¬ 
tor or utility test. In cases where utilities have divested 
generation, a calculated avoided cost or a wholesale 
market price projection is used to represent the genera¬ 
tion benefits. Cost-effectiveness tests are appropriate to 
screen out poor program design, and to identify pro¬ 
grams in markets that have been transformed and might 
need to be redesigned to continue. Cost-effectiveness 
analysis is important but must be supplemented by other 
aspects of the planning process. 

If the TRC or societal tests are used, "other resource bene¬ 
fits" can include environmental benefits, water savings, and 
other fuel savings. Costs include all program costs (admin¬ 
istrative, marketing, incentives, and evaluation) as well as 
customer costs. Future benefits from emissions trading (or 
other regulatory approaches that provide payment for emis¬ 
sion credits) could be treated as additional benefits in any of 
these models. Other benefits of programs can include job 
impacts, sales generated, gross state product added, 
impacts from wholesale price reductions, and personal 
income (Wisconsin, 2006; Massachusetts, 2004). 

Example of Other Benefits 

The Massachusetts Division of Energy Resources 
estimates that its 2002 DSM programs produced 
2,093 jobs, increased disposable income by $79 
million, and provided savings to all customers of 
$ 19.4 million due to lower wholesale energy clear¬ 
ing prices (Massachusetts, 2004). 

At a minimum, regulators require programs to be cost- 
effective at the sector level (residential, commercial, and 
industrial) and typically at the program level as well. 
Many program administrators bundle measures under a 
single program umbrella when, in reality, measures are 
delivered to customers through different strategies and 
marketing channels. This process allows program admin- 


5 The RIM test is viewed as less certain than the other tests because it is sensitive to the difference between long-term projections of marginal or market 
costs and long-term projections of rates (CEC, 2001). 


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Table 6-7. Overview of Cost-Effectiveness Tests 


Benefits 

Costs 

Test 

Externalities 

Energy 
Benefits 
G. T&D 

Demand 
Benefits 
G, T&D 

Non-Energy 

Benefits 

Other 

Resource 

Benefits 

Impact 

On 

Rates 

Program 

Implementation 

Costs 

Program 

Evaluation 

Costs 

Customer 

Costs 

Total Resource 
Cost Test 


X 

X 


X 


X 

X 

X 

Societal Test 

X 

X 

X 

X 

X 


X 

X 

X 

Utility Test/ 

Administrator 

Test 


X 

X 




X 

X 


Rate Impact 

Test 


X 

X 



X 

X 

X 


Participant Test 


X 

X 

X 





X 


G, T&D = Generation, Transmission, and Distribution 


istrators to adjust to market realities during program 
implementation. For example, within a customer class or 
segment, if a high-performing and well-subscribed pro¬ 
gram or measure is out-performing a program or meas¬ 
ure that is not meeting program targets, the program 
administrator can redirect resources without seeking 
additional regulatory approval. 

Individual programs should be screened on a regular basis, 
consistent with the regulatory schedule—typically, once a 
year. Individual programs in some customer segments, 
such as low income, are not always required to be cost- 
effective, as they provide other benefits to society that 
might not all be quantified in the cost-effectiveness tests. 
The same is true of education-only programs that have 
hard-to-quantify benefits in terms of energy impacts. (See 
section on conducting impact evaluations for information 
related to evaluating energy education programs.) 

Existing measures should be screened by the program 
administrator at least every two years, and new meas¬ 
ures should be screened annually to ensure they are per¬ 
forming as anticipated. Programs should be reevaluated 
and updated from time to time to reflect new methods, 


technologies, and systems. For example, many programs 
today include measures such as T-5 lighting that did not 
exist five to ten years ago. 

Consider Building Codes and Appliance 
Standards When Designing Programs 

Enacting state and federal codes and standards for new 
products and buildings is often a cost-effective opportunity 
for energy savings. Changes to building codes and appli¬ 
ance standards are often considered an intervention that 
could be deployed in a cost-effective way to achieve 
results. Adoption of state codes and standards in many 
states requires an act of legislation beyond the scope of 
utility programming, but utilities and other third-party 
program administrators can and do interact with state 
and federal codes and standards in several ways: 

• In the case of building codes, code compliance and 
actual building performance can lag behind enactment 
of legislation. Some energy efficiency program admin¬ 
istrators design programs with a central goal of 
improving code compliance. Efficiency Vermont's 
ENERGY STAR Homes program (described in the box 
on page 6-24) includes increasing compliance with 
Vermont Building Code as a specific program objective. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-23 





















The California investor owned utilities also are working 
with the national ENERGY STAR program to ensure 
availability of ENERGY STAR/Title 24 Building Code- 
compliant residential lighting fixtures and to ensure 
overall compliance with their new residential building 
code through their ENERGY STAR Homes program. 

•Some efficiency programs fund activities to advance 
codes and standards. For example, the California lOUs 
are funding a long-term initiative to contribute expertise, 
research, analysis, and other kinds of support to help the 
California Energy Commission.(CEC) develop and adopt 
energy efficiency standards. One rationale for utility 
investment in advancing codes and standards is that util¬ 
ities can lock in a baseline of energy savings and free up 
program funds to work on efficiency opportunities that 
could not otherwise be realized. In California's case, the 
lOUs also developed a method for estimating savings 
associated with their codes and standards work. The 
method was accepted by the California Public Utilities 
Commission, and is formalized in the California 
Energy Efficiency Evaluation Protocols: Technical, 
Methodological, and Reporting Require-ments for 
Evaluation Professionals (CPUC, 2006). 


when pursuing state codes and standards, to ensure that 
retailers and manufacturers can respond appropriately in 
delivering products to market. 

Program administrators must be aware of codes and 
standards. Changes in codes and standards affect the 
baseline against which future program impacts are 
measured. Codes and standards should be explicitly con¬ 
sidered in planning to prevent double counting. The 
Northwest Power and Conservation Council (NWPCC) 
explicitly models both state codes and federal standards 
in its long-term plan (NWPCC, 2005). 

Plan for Developing and Incorporating New 
Technology 

Many of the organizations reviewed have a history of 
providing programs that change over time to accommo¬ 
date changes in the market and the introduction of new 
technologies. The new technologies are covered using 
one or more of the following approaches: 


Regardless of whether they are a component of an energy 
efficiency program, organizations have found that it is 
essential to coordinate across multiple states and regions 


•They are included in research and development (R&D) 
budgets that do not need to pass cost-effectiveness 
tests, as they are, by definition, addressing new or 
experimental technologies. Sometimes R&D funding 


Efficiency Vermont ENERGY STAR Homes Program 


In the residential new construction segment, Efficiency 
Vermont partners with the national ENERGY STAR pro¬ 
gram to deliver whole house performance to its cus¬ 
tomers and meet both resource acquisition and 
market transformation goals. Specific objectives of 
Efficiency Vermont's program are to: 

• Increase market recognition of superior construction 

• Increase compliance with the Vermont Building Code 

•Increase penetration of cost-effective energy 
efficiency measures 

• Improve occupant comfort, health, and safety 
(including improved indoor air quality) 


•Institutionalize Home Energy Rating Systems (HERS) 

Participating homebuilders agree to build to the pro¬ 
gram's energy efficiency standards and allow homes 
to be inspected by an HERS rater. The home must 
score 86+ on the HERS inspection and include four 
energy efficient light fixtures, power-vented or sealed 
combustion equipment, and an efficient mechanical 
ventilation system with automatic controls. When a 
home passes, builders receive a rebate check, pro¬ 
gram certificate, an ENERGY STAR Homes certificate, 
and gifts. Efficiency Vermont ENERGY STAR 
Homes Program saved more than 700 MWh 
with program spending of $1.4 million in 2004. 

Source: Efficiency Vermont, 2005 


6-24 National Action Plan for Energy Efficiency 


_ 






comes from sources other than the utility or state 
agency. Table 6-8 summarizes R&D activities of several 
organizations reviewed. 

• They are included in pilot programs that are funded as 
part of an overall program portfolio and are not indi¬ 
vidually subject to cost-effectiveness tests. 


that targets improved energy efficiency and energy man¬ 
agement will enable society to advance and sustain ener¬ 
gy efficiency in the absence of government-sponsored or 
regulatory-mandated programs. Robust and competitive 
consumer-driven markets are needed for energy efficient 
devices and energy efficiency service. 


• They are tested in limited quantities under existing pro¬ 
grams (such as commercial and industrial custom 
rebate programs). 

Technology innovation in electricity use has been the cor¬ 
nerstone of global economic progress for more than 50 
years. In the future, advanced industrial processes, heating 
and cooling, and metering systems will play very impor¬ 
tant roles in supporting customers' needs for efficient 
use of energy. Continued development of new, more 
efficient technologies is critical for future industrial and 
commercial processes. Furthermore, technology innovation 


The Electric Power Research Institute (EPRI)/U.S. 
Department of Energy (DOE) Gridwise collaborative and 
the Southern California Edison (SCE) Lighting Energy 
Efficiency Demand Response Program are two examples 
of research and development activities: 

• The EPRI IntelliGrid Consortium is an industry-wide ini¬ 
tiative and public/private partnership to develop the 
technical foundation and implementation tools to 
evolve the power delivery grid into an integrated energy 
and communications system on a continental scale. A 
key development by this consortium is the IntelliGrid 
Architecture, an open-standards-based architecture 


Table 6-8. Research & Development (R&D) Activities of Select Organizations 


Program 

Administrator 

R&D Funding Mechanism(s) 

R&D as % of Energy 
Efficiency Budget 

Examples of R&D Technologies/ 
Initiatives Funded 

PG&E 

CEC Public Interest Energy Research (PIER) performs research from 
California SBC funding (PG&E does not have access to their bills' 
SBC funds); other corporate funds support the California Clean 
Energy Fund 

1% a - b 

California Clean Energy Fund - New 
technologies and demonstration projects 

NYSERDA 

SBC funding 

13% c,d 

Product development, demonstration 
and evaluation, university research, tech¬ 
nology market opportunities studies 

BPA 

In rates 

6% e,f 

PNL / DOE GridWise Collaborative, 
Northwest Energy Efficiency Alliance, 
university research 

SCE 

CEC Public Interest Energy Research (PIER) performs research from 
California SBC funding (SCE does not have access to their bills' 

SBC funds). Procurement proceedings and other corporate funds 
support Emerging Technologies and Innovative Design for Energy 
Efficiency programs. 

5%g- h -' 

Introduction of emerging technologies 
(second D of RD&D) 


a [Numerator] $4 million in 2005 for California! Clean Energy Fund (CCEF, 2005). 


b [Denominator] $867 million to be spent 2006-2008 on energy efficiency projects not including evaluation, measurement, and validation (CPUC, 
2005). 1/3 of full budget used for single year budget ($289 million). 

c [Numerator] $17 million for annual energy efficiency R&D budget consists of "residential ($8 M), industrial ($6 M), and transportation ($3 M)" 
(G. Walmet, NYSERDA, personal communication, May 23, 2006). 

d [Denominator] $134 M for New York Energy $mart from 3/2004-3/2005 (NYSERDA, 2005b). 

e [Numerator] BPA funded the Northwest Energy Efficiency Alliance with $10 million in 2003. [Denominator] The total BPA energy efficiency alloca¬ 
tion was $138 million (Blumstein, et al., 2005). 

f [Note] BPA overall budgetting for energy efficiency increased in subsequent years (e.g., $170 million in 2004 with higher commitments going to an 
average of $245 million from 2006-2012) (Alliance to Save Energy, 2004). 

g Funding for the statewide Emerging Technologies program will increase in 2006 to $10 million [Numerator] out of a total budget of $581 million 
[Denominator] for utility energy-efficiency programs (Mills and Livingston, 2005). 

h [Note] Data from Mills and Livingston (2005) differs from $675 million 3-yr figure from CPUC (2005). 

1 Additional 3% is spent on Innovative Design for Energy Efficiency (InDEE) (D. Arambula, SCE, personal communication, June 8, 2006). 


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for integrating the data communication networks and 
smart equipment on the grid and on consumer prem¬ 
ises. Another key development is the consumer portal— 
essentially, a two-way communication link between 
utilities and their customers to facilitate information 
exchange (EPRI, 2006). Several efficiency program admin¬ 
istrators are pilot testing GridWise/Intelligrid as 
presented in the box below. 

• The Lighting Energy Efficiency Demand Response 
Program is a program proposed by SCE. It will use 
Westinghouse's two-way wireless dimmable energy effi¬ 
ciency T-5 fluorescent lighting as a retrofit for existing 
T-12 lamps. SCE will be able to dispatch these lighting 
systems using wireless technology. The technology will be 
piloted in small commercial buildings, the educational 
sector, office buildings, and industrial facilities and could 
give SCE the ability to reduce load by 50 percent on those 
installations. This is an excellent example of combining 
energy efficiency and direct load control technologies. 

Both EPRI and ESource (a for-profit, membership-based 
energy information service) are exploring opportunities 
to expand their efforts in these areas. ESource is also 

Pilot Tests of GridWise/Intelligrid 

GridWise Pacific Northwest Demonstration Projects 
These projects are designed to demonstrate how 
advanced, information-based technologies can be 
used to increase power grid efficiency, flexibility, and 
reliability while reducing the need to build additional 
transmission and distribution infrastructure. These 
pilots are funded by DOE's Office of Electricity 
Delivery and Energy Reliability. 

Olympic Peninsula Distributed Resources 
Demonstration 

This project will integrate demand response and dis¬ 
tributed resources to reduce congestion on the grid, 
including demand response with automated control 
technology, smart appliances, a virtual real-time 


considering developing a database of new energy 
efficiency and load response technologies. Leveraging 
R&D resources through regional and national partnering 
efforts has been successful in the past with energy effi¬ 
ciency technologies. Examples include compact fluores¬ 
cent lighting, high-efficiency ballasts and new washing 
machine technologies. Regional and national efforts 
send a consistent signal to manufacturers, which can be 
critical to increasing R&D activities. 

Programs must be able to incorporate new technologies 
over time. As new technologies are considered, the pro¬ 
grams must develop strategies to overcome the barriers 
specific to these technologies to increase their acceptance. 
Table 6-9 provides some examples of new technologies, 
challenges, and possible strategies for overcoming these 
challenges. A cross-cutting challenge for many of these 
technologies is that average rate designs do not send a 
price signal during periods of peak demand. A strategy 
for overcoming this barrier would be to investigate time- 
sensitive rates (see Chapter 5: Rate Design for additional 
information). 


market, Internet-based communications, contract 
options for customers, and the use of distributed 
generation. 

Grid-Friendly Appliance Demonstration 
In this project, appliance controllers will be used in 
both clothes dryers and water heaters to detect fluc¬ 
tuations in frequency that indicate there is stress in 
the grid, and will respond by reducing the load on 
that appliance. 



These pilots include: Pacific Northwest National 
Laboratory, Bonneville Power Administration, 
PacificCorp, Portland General Electric, Mason County 
PUD #3, Clallam County PUD, and the city of Port 
Angeles. 


6-26 National Action Plan for Energy Efficiency 









Table 6-9. Emerging Technologies for Programs 


Technology/ 

Program 

Description 

Availability 

Key 

Challenges 

Key 

Strategies 

Examples 

Smart Grid/ 

GridWise 

technologies 

Smart grid technologies include both customer-side 
and grid-side technologies that allow for more 
efficient operation of the grid. 

Available in pilot 
situations 

Cost 

Customer 

Acceptance 

Communication 

Protocols 

Pilot programs 

R&D programs 

GridWise pilot 
in Pacific NW 

Smart 
appliances/ 
Smart Homes 

Homes with gateways that would allow for control 
of appliances and other end-uses via the Internet. 

Available 

Cost 

Customer 

Acceptance 

Communication 

Protocols 

Pilot programs 

Customer education 

GridWise pilot 
in Pacific NW 

Load control of 
A/C via smart 
thermostat 

A/C controlled via smart thermostat. 

Communication can be via wireless, power line 
carrier (PLC) or Internet. 

Widely available 

Cost 

Customer 

acceptance 

Used to control 
loads in congested 
situation 

Pilot and full-scale 
programs 

Customer education 

Long Island Power 
Authority (LIPA), 

Austin Energy, 

Utah Power and 

Light, ISO New 
England 

Dynamic 

pricing/critical 

peak pricing/ 

thermostat 

control with 

enhanced 

metering 

Providing customers with either real time or critical 
peak pricing via a communication technology. 
Communication can be via wireless, PLC, or 

Internet. Customers can also be provided with 
educational materials. 

Available 

Cost 

Customer 

acceptance 

Split incentives in 
deregulated markets 

Regulatory barriers 

Pilot and full-scale 
Programs 

Used in 

congested areas 

Customer 

education 

Georgia (large 
users) Niagara 
Mohawk, California 
Peak Pricing 
Experiment, Gulf 
Power 

Control of 
lighting via 
wireless, power 
line carrier 
or other 
communication 
technologies 

Using direct control to control commercial lighting 
during high price periods. 

Recently available 

Cost 

Customer 

acceptance 

Contractor 

acceptance 

R&D programs 

Pilot programs 

SCE pilot using 
wireless 

NYSERDA pilot 
with power line 
carrier control 

T-5s 

Relatively new lighting technology for certain 
applications. 

Widely available 

Cost 

Customer 

acceptance 

Contractor 

acceptance 

Add to existing 
programs as a 
new measure 

Included in 
most large-scale 
programs 

New generation 
tankless water 
heaters 

Tankless water heaters do not have storage tanks 
and do not have standby losses. They can save 
energy relative to conventional water heaters in 
some applications. Peak demand implications are 
not yet known. 

Widely available 

Cost 

Customer 

acceptance 

Contractor 

acceptance 

Add to existing 
programs as a 
new measure 

More common 
in the EU 


Some load control technologies will require more than 
R&D activities to become widespread. To fully capture 
and utilize some of these technologies, the following 
four building blocks are needed: 


• Interactive communications. Interactive communica¬ 
tions that allow for two-way flow of price information 
and decisions would add new functionality to the 
electricity system. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-27 


















• Innovative rates and regulation. Regulations are needed 
to provide adequate incentives for energy efficiency 
investments to both suppliers and customers. 

• Innovative markets. Market design must ensure that 
energy efficiency and load response measures that are 
advanced by regulation become self-sustaining in the 
marketplace. 

• Smart end-use devices. Smart devices are needed to 
respond to price signals and facilitate the management of 
the energy use of individual and networked appliances. 

In addition, the use of open architecture systems is the 
only long-term way to take existing non-communicating 
equipment into an energy-efficient future that can use 
two-way communications to monitor and diagnose 
appliances and equipment. 

Consider Efficiency Investments to Alleviate 
Transmission and Distribution Constraints 

Energy efficiency has a history of providing value by reduc¬ 
ing generation investments. It should also be considered 
with other demand-side resources, such as demand 
response, as a potential resource to defer or avoid invest¬ 
ments in transmission and distribution systems. Pacific Gas 
and Electric's (PG&E) Model Energy Communities Project (the 
Delta Project) provides one of the first examples of this 
approach. This project was conceived to test whether 
demand resources could be used as a least cost resource to 
defer the capital expansion of the transmission and distribu¬ 
tion system in a constrained area. In this case, efforts were 
focused on the constrained area, and customers were 
offered versions of existing programs and additional meas¬ 
ures to achieve a significant reduction in the constrained 
area (PG&E, 1993). A recently approved settlement at the 
Federal Energy Regulatory Commission (FERC) allows energy 
efficiency along with load response and distributed genera¬ 
tion to participate in the Independent System Operator New 
England (ISO-NE) Forward Capacity Market (FERC, 2006; 
FERC, 2005). In addition, Consolidated Edison has success¬ 
fully used a Request For Proposals (RFP) approach to defer 
distribution upgrades in four substation areas with contracts 


totaling 45 MW. Con Ed is currently in a second round of / 
solicitations for 150 MW (NAESCO, 2005). Recent pilots 
using demand response, energy efficiency, and intelligent 
grid are proving promising as shown in the BPA example in 
the box on page 6-29. 


To evaluate strategies for deferring transmission and distribu¬ 
tion investments, the benefits and costs of energy efficiency 
and other demand resources are compared to the cost of 


deferring or avoiding a distribution or transmission upgrade 
(such as a substation upgrade) in a constrained area. This 


cost balance is influenced by location-specific transmission 
and distribution costs, which can vary greatly. 


Create a Roadmap of Key Program Components, 
Milestones, and Explicit Energy Use Reduction 
Goals 


Decisions regarding the key considerations discussed 
throughout this section are used to inform the develop¬ 
ment of an energy efficiency plan, which serves as a 
roadmap with key program components, milestones, 
and explicit energy reduction goals. 

A well-designed plan includes many of the elements dis¬ 
cussed in this section including: 

•Budgets (see section titled "Leverage Private-Sector 
Expertise, External Funding, and Financing" for informa¬ 
tion on the budgeting processes for the most 
common policy models) 

— Overall 

— By program 

• Kilowatt, kWh, and Mcf savings goals overall and by 
program 

— Annual savings 

— Lifetime savings 

• Benefits and costs overall and by program 

• Description of any shareholder incentive mechanisms 




6-28 National Action Plan for Energy Efficiency 























Bonneville Power Administration (BPA) Transmission Planning 


BPA has embarked on a new era in transmission 
planning. As plans take shape to address load 
growth, constraints, and congestion on the transmis¬ 
sion system, BPA is considering measures other than 
building new lines, while maintaining its commit¬ 
ment to provide reliable transmission service. The 
agency, along with others in the region, is exploring 
"non-wires solutions" as a way to defer large 
construction projects. 

BPA defines non-wires solutions as the broad array 
of alternatives including, but not limited to, demand 
response, distributed generation, conservation meas¬ 
ures, generation siting, and pricing strategies that 
individually, or in combination, delay or eliminate the 


need for upgrades to the transmission system. The 
industry also refers to non-wires solutions as non¬ 
construction alternatives or options. 

BPA has reconfigured its transmission planning 
process to include an initial screening of projects to 
assess their potential for a non-wires solution. BPA is 
now committed to using non-wires solutions screening 
criteria for all capital transmission projects greater 
than $2 million, so that it becomes an institutional¬ 
ized part of planning. BPA is currently sponsoring a 
number of pilot projects to test technologies, resolve 
institutional barriers, and build confidence in using 
non-wires solution. 


For each program, the plan should include the following: 

• Program design description 

• Objectives 
•Target market 

• Eligible measures 

• Marketing plan 

• Implementation strategy 

• Incentive strategy 

• Evaluation plan 

• Benefit/cost outputs 

• Metrics for program success 

• Milestones 

The plan serves as a road-map for programs. Most pro¬ 
gram plans, however, are modified over time based on 


changing conditions (e.g., utility supply or market changes) 
and program experience. Changes from the original 
roadmap should be both documented and justified. A plan 
that includes all of these elements is an appropriate start¬ 
ing point for a regulatory filing. A well-documented plan is 
also a good communications vehicle for informing and 
educating stakeholders. The plan should also include a 
description of any pilot programs and R&D activities. 

Energy Efficiency Program Design 
and Delivery 

The organizations reviewed for this chapter have learned 
that program success is built over time by understanding 
the markets in which efficient products and services are 
delivered, by addressing the wants and needs of their 
customers, by establishing relationships with customers 
and suppliers, and by designing and delivering programs 
accordingly. 

• They have learned that it is essential to program suc¬ 
cess to coordinate with private market actors and other 
influential stakeholders, to ensure that they are well 
informed about program offerings and share this 
information with their customers/constituents. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-29 






• Many of the organizations reviewed go well beyond 
merely informing businesses and organizations, by 
actually partnering with them in the design and delivery 
of one or more of their efficiency programs. 

• Recognizing that markets are not defined by utility 
service territory, many utilities and other third-party 
program administrators actively cooperate with one 
another and with national programs, such as ENERGY 
STAR, in the design and delivery of their programs. 

This section discusses key best practices that emerge 
from a decade or more of experience designing and 
implementing energy efficiency programs. 

Begin With the Market in Mind 

Energy efficiency programs should complement, rather 
than compete with, private and other existing markets 
for energy efficient products and services. The rationale 
for utility or third-party investment in efficiency program¬ 
ming is usually based on the concept that within these 
markets, there are barriers that need to be overcome to 
ensure that an efficient product or service is chosen over 
a less efficient product or standard practice. Barriers 
might include higher initial cost to the consumer, lack of 
knowledge on the part of the supplier or the customer, 
split incentives between the tenant who pays the utility 
bills and the landlord who owns the building, lack of 
supply for a product or service, or lack of time (e.g., to 
research efficient options, seek multiple bids—particularly 
during emergency replacements). 


consumer decision-making, and what approaches might / 
work best to overcome barriers to greater supply and 
investment in energy efficient options, and/or uptake of a 
program. A critical part of completing a market assessment 
is a baseline measurement of the goods and sen/ices 
involved and the practices, attitudes, behaviors, factors, 
and conditions of the marketplace (Feldman, 1994). In 
addition to informing program design and implementa¬ 
tion, the baseline assessment also helps inform program 
evaluation metrics, and serves as a basis for which future 
program impacts are measured. As such, market assess¬ 
ments are usually conducted by independent third-party 
evaluation professionals. The extent and needs of a market 
assessment can vary greatly. For well-established program 
models, market assessments are somewhat less involved, 
and can rely on existing program experience and literature, 
with the goal of understanding local differences and estab¬ 
lishing the local or regional baseline for the targeted energy 
efficiency product or service. 



Table 6-10 illustrates some of the key stakeholders, bar 
riers to energy efficiency, and program strategies that are 
explored in a market assessment, and are useful for 
considering when designing programs. 


Solicit Stakeholder Input 

Convening stakeholder advisory groups from the onset 
as part of the design process is valuable for obtaining 
multiple perspectives on the need and nature of planned 
programs. This process also serves to improve the pro¬ 
gram design, and provides a base of program support 
within the community. 




Conduct a Market Assessment 

Understanding how markets function is a key to successful 
program implementation, regardless of whether a program 
is designed for resource acquisition, market transforma¬ 
tion, or a hybrid approach. A market assessment can be a 
valuable investment to inform program design and imple¬ 
mentation. It helps establish who is part of the market 
(e.g., manufacturers, distributors, retailers, consumers), 
what the key barriers are to greater energy efficiency from 
the producer or consumer perspectives, who are the key 
trend-setters in the business and the key influencers in 


Once programs have been operational for a while, stake¬ 
holder groups should be reconvened to provide program 
feedback. Stakeholders that have had an ongoing relation¬ 
ship with one or more of the programs can provide insight 
on how the programs are operating and perceived in the 
community, and can recommend program modifications. 
They are also useful resources for tapping into extended 
networks beyond those easily accessible to the program 
providers. For example, contractors, building owners, and 
building operators can be helpful in providing access to 
their specific trade or business organizations. 


6-30 National Action Plan for Energy Efficiency 















Table 6-10. Key Stakeholders. Barriers, and Program Strategies 
by Customer Segment 


Customer 

Segment 

Key Stakeholders 

Key Program Barriers 

Key Program Strategies 

Large 

Commercial 
& Industrial 
Retrofit 

• Contractors 

• Building owners and operators 

• Distributors: lighting, HVAC, motors, other 

• Product manufacturers 

• Engineers 

• Energy services companies 

• Access to capital 

• Competing priorities 

• Lack of information 

• Short-term payback (<2 yr) mentality 

• Financial incentives (rebates) 

• Performance contracting 

• Performance benchmarking 

• Partnership with ENERGY STAR 

• Low interest financing 

• Information from unbiased sources 

• Technical assistance 

• Operations and maintenance training 

Small 

Commercial 

• Distributors: lighting, HVAC, other 

• Building owners 

• Business owners 

• Local independent trades 

• Access to capital 

• Competing priorities 

• Lack of information 

• Financial incentives (rebates) 

• Information from unbiased sources 

• Direct installation 

• Partnership with ENERGY STAR 

Commercial & 
Industrial New 
Construction 

• Architects 

• Engineers 

• Building and energy code officials 

• Building owners 

• Potential occupants 

• Project/program timing 

• Competing priorities 

• Split incentives (for rental property) 

• Lack of information 

• Higher initial cost 

• Early intervention (ID requests for hook-up) 

• Design assistance 

• Performance targeting/benchmarking 

• Partnership with ENERGY STAR 

• Training of architects and engineers 

• Visible and ongoing presence in design 
community 

• Education on life cycle costs 

Residential 
Existing Homes 

• Distributors: appliances, HVAC, lighting 

• Retailers: appliance, lighting, windows 

• Contractors: HVAC, insulation, remodeling 

• Homeowners 

• Higher initial cost 

• Lack of information 

• Competing priorities 

• Inexperience or prior negative experience 
w/technology (e.g., early compact 
florescent lighting) 

• Emergency replacements 

• Financial incentives 

• Partnership with ENERGY STAR 

• Information on utility Web sites, bill inserts, 
and at retailers 

• Coordination with retailers and contractors 

Residential 

New Homes 

• Contractors: general and HVAC 

• Architects 

• Code officials 

• Builders 

• Home buyers 

• Real estate agents 

• Financial institutions 

• Higher initial cost 

• Split incentives: builder is not the 
occupant 

• Partnership with ENERGY STAR 

• Linking efficiency to quality 

• Working with builders 

• Building code education & compliance 

• Energy efficient mortgages 

Multifamily 

• Owners and operators 

• Contractors 

• Code officials 

• Tenants 

• Split incentives 

• Lack of awareness 

• Financial incentives 

• Marketing through owner and operator 
associations 

Low Income 

• Service providers: Weatherization 

Assistance Program (WAP), Low-Income 
Home Energy Assistance Program (LIHEAP) 

• Social service providers: state and local 
agencies 

• NGOs and advocacy groups 

• Credit counseling organizations 

• Tenants 

• Program funding 

• Program awareness 

• Bureaucratic challenges 

• Consistent eligibility requirements with 
existing programs 

• Direct installation 

• Leveraging existing customer channels for 
promotion and delivery 

• Fuel blind approach 


To be successful, stakeholder groups should focus on the 
big picture, be well organized, and be representative. 
Stakeholder groups usually provide input on budgets, 
allocation of budgets, sectors to address, program 
design, evaluation, and incentives. 


Listen to Customer and Trade Ally Needs 
Successful energy efficiency programs do not exist without 
customer and trade ally participation and acceptance of 
these technologies. Program designs should be tested 
with customer market research before finalizing offerings. 
Customer research could include surveys, focus groups, 


To create a sustainable, aggressive national commitment to energy efficiency 


6-31 


















Best Practice: Solicit Stakeholder Input 

Minnesota's Energy Efficiency Stakeholder Process 
exemplifies the best practice of engaging stake¬ 
holders in program design. The Minnesota Public 
Utility Commission hosted a roundtable with the 
commission, utilities, and other stakeholders to 
review programs. Rate implications and changes to 
the programs are worked out through this collabo¬ 
rative and drive program design (MPUC, 2005). 

Successful stakeholder processes generally have the 
following attributes: 

• Neutral facilitation of meetings. 

• Clear objectives for the group overall and for each 
meeting. 

• Explicit definition of stakeholder group's role in 
program planning (usually advisory only). 

• Explicit and fair processes for providing input. 

•A timeline for the stakeholder process. 


forums, and in-depth interviews. Testing of incentive levels 
and existing market conditions by surveying trade allies 
is critical for good program design. 

Use Utility Channels and Brand 

Utilities have existing channels for providing information 
and service offerings to their customers. These include 
Web sites, call centers, bill stuffers, targeted newsletters, 
as well as public media. Using these channels takes 
advantage of existing infrastructure and expertise, and 
provides customers with energy information in the way 
that they are accustomed to obtaining it. These methods 
reduce the time and expense of bringing information to 
customers. In cases where efficiency programming is 
delivered by a third party, gaining access to customer 
data and leveraging existing utility channels has been 
highly valuable for program design and implementation. 
In cases such as Vermont (where the utilities are not 
responsible for running programs), it has been helpful to 
have linkages from the utility Web sites to Efficiency 
Vermont's programs, and to establish Efficiency Vermont 


as a brand that the utilities leverage to deliver information , 
about efficiency to their customers. 

Promote the Other Benefits of Energy Efficiency 
and Energy Efficient Equipment 

Most customers are interested in reducing energy con¬ 
sumption to save money. Many, however, have other 
motivations for replacing equipment or renovating space 
that are consistent with energy efficiency improvements. 
For example, homeowners might replace their heating 
system to improve the comfort of their home. A furnace 
with a variable speed drive fan will further increase com¬ 
fort (while saving energy) by providing better distribution 
of both heating and cooling throughout the home and 
reducing fan motor noise. It is a best practice for pro¬ 
gram administrators to highlight these features where 
non-energy claims can be substantiated. 


Coordinate With Other Utilities and Third-Party 
Program Administrators 

Coordination with other utilities and third-party program 
administrators is also important. Both program allies and 
customers prefer programs that are consistent across 
states and regions. This approach reduces transaction 
costs for customers and trade allies and provides consis¬ 
tent messages that avoid confusing the market. Some 
programs can be coordinated at the regional level by 
entities such as Northeast Energy Efficiency Partnership 
(NEEP), the Northwest Energy Efficiency Alliance, and the 
Midwest Energy Efficiency Alliance. Figure 6-1 illustrates 
the significant impact that initiative sponsors of the 
Northeast Lighting and Appliance Initiative (coordinated 
regionally by NEEP) have been able to have on the mar¬ 
ket for energy-efficient clothes washers by working in 
coordination over a long time period. NEEP estimates 
the program is saving an estimated 36 million kWh 
per year, equivalent to the annual electricity needs 
of 5,000 homes ( NEEP, undated). 

Similarly, low-income programs benefit from coordina¬ 
tion with and use of the same eligibility criteria as the 
federal Low-Income Home Energy Assistance Program 
(LIHEAP) or Weatherization Assistance Program (WAP). 
These programs have existing delivery channels that can 


6-32 National Action Plan for Energy Efficiency 



















Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative 


LO 

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to „ „ 

fp 0.8 


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a: 0.3 


c 
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u 

£ 1998 





2007: Federal Minimum Efficiency 
Standard takes effect /» 


- ♦ - Sponsor states with initiative 



National average 



“ A - Sponsor states absent initiative 


Sponsor states * * 

(with initiative) t * 





2003: National clothes washers 
campaign kicks off 

*—• 

* * 

2004: More stringent BilBtGY ' ' 

STAR spec takes effect ^ ^ 


1998: 6 manufacturers, 2002:18 manufacturers, 

IS qualified products 99 qualified products 

m 

i 

* 


2001: Whirlpool enters 
market 

m "" ▼ 

s National 

/ Average 


1998: Regional 
initiative begins 


- - -f . , A* " j 



^ 90tM " ’ ■ 



_ mb ___ 

1 

1 

* 

1 

1 

1 

(absent initiative) 



1999 


2000 


2001 


2002 


2003 


2004 


2005 


2006 


2007 


be used to keep program costs down while providing 
substantial benefit to customers. On average, weather- 
ization reduces heating bills by 31 percent and overall 
energy bills by $274 per year for an average cost per 
home of $2,672 per year. Since 1999, DOE has been 
encouraging the network of weatherization providers to 
adopt a whole-house approach whereby they approach 
residential energy efficiency as a system rather than as a 
collection of unrelated pieces of equipment (DOE, 2006). 
The Long Island Power Authority's (LIPA) program shown 
at right provides an example. 

Leverage the National ENERGY STAR Program 

Nationally, ENERGY STAR provides a platform for pro¬ 
gram implementation across customer classes and 
defines voluntary efficiency levels for homes, buildings, 
and products. ENERGY STAR is a voluntary, public-private 
partnership designed to reduce energy use and related 
greenhouse gas emissions. The program, administered 
by the U.S. Environmental Protection Agency (EPA) and 
the DOE, has an extensive network of partners including 
equipment manufacturers, retailers, builders, ESCOs, pri¬ 
vate businesses, and public sector organizations. 

Since the late 1990s, EPA and DOE have worked with 
utilities, state energy offices, and regional nonprofit 
organizations to help leverage ENERGY STAR messaging, 


tools, and strategies to enhance local energy efficiency 
programs. Today more than 450 utilities (and other effi¬ 
ciency program administrators), servicing 65 
percent of U.S. households, participate in the ENERGY 
STAR program. (See box on page 6-34 for additional 
information.) New Jersey and Minnesota provide examples 
of states that have leveraged ENERGY STAR. 

Long Island Power Authority (LIPA): 
Residential Energy Affordability 
Partnership Program (REAP) 

This program provides installation of comprehen¬ 
sive electric energy efficiency measures and energy 
education and counseling. The program targets 
customers who qualify for DOE's Low-Income 
Weatherization Assistance Program (WAP), as well 
as electric space heating and cooling customers 
who do not qualify for WAP and have an income 
of no more than 60 percent of the median house¬ 
hold income level. LIPA's REAP program has saved 
2.5 MW and 21,520 MWh 1999 to 2004 with 
spending of $12.4 million. 

Source: LIPA, 2004 


To create a sustainable, aggressive national commitment to energy efficiency 


6-33 































• New Jersey's Clean Energy Program. The New Jersey 
Board of Public Utilities, Office of Clean Energy has incor¬ 
porated ENERGY STAR tools and strategies since the 
inception of its residential products and Warm Advantage 
(gas) programs. Both programs encourage customers to 
purchase qualified lighting, appliances, windows, pro¬ 
grammable thermostats, furnaces, and boilers. The New 


Jersey Clean Energy Program also educates consumers, M 
retailers, builders, contractors, and manufacturers about 
ENERGY STAR. In 2005, New Jersey’s Clean Energy 
Program saved an estimated 60 million kWh of elec¬ 
tricity, 1.6 million therms of gas, and 45,000 tons of 
carbon dioxide (CO2). 


ENERGY STAR Program Investments 

In support of the ENERGY STAR program, EPA and 
DOE invest in a portfolio of energy efficiency efforts 
that utilities and third-party program administrators 
can leverage to further their local programs including: 

• Education and Awareness Building. ENERGY STAR 
sponsors broad-based public campaigns to educate 
consumers on the link between energy use and air 
emissions, and to raise awareness about how products 
and services carrying the ENERGY STAR label can 
protect the environment while saving money. 

•Establishing Performance Specifications and 
Performing Outreach on Efficient Products. More 
than 40 product categories include ENERGY STAR- 
qualifying models, which ENERGY STAR promotes 
through education campaigns, information 
exchanges on utility-retailer program models, and 
extensive online resources. Online resources include 
qualifying product lists, a store locator, and information 
on product features. 

• Establishing Energy Efficiency Delivery Models to 
Existing Homes. ENERGY STAR assistance includes 
an emphasis on home diagnostics and evaluation, 
improvements by trained technicians/building pro¬ 
fessionals, and sales training. It features online 
consumer tools including the Home Energy Yardstick 
and Home Energy Advisor. 


• Establishing Performance Specifications and 
Performing Outreach for New Homes. ENERGY 
STAR offers builder recruitment materials, sales 
toolkits, consumer messaging, and outreach that 
help support builder training, consumer education, 
and verification of home performance. 

• Improving the Performance of New and Existing 
Commercial Buildings. EPA has designed an Energy 
Performance Rating System to measure the energy 
performance at the whole-building level, to help go 
beyond a component-by-component approach that 
misses impacts of design, sizing, installation, 
controls, operation, and maintenance. EPA uses this 
tool and other guidance to help building owners 
and utility programs maximize energy savings. 

Additional information on strategies, tools, and 
resources by customer segment is provided in the fact 
sheet "ENERGY STAR—A Powerful Resource for 
Saving Energy," which can be downloaded from 
www.epa.gov/cleanenergy/pdf/napee_energystar- 
factsheet.pdf. 



h 


6-34 National Action Plan for Energy Efficiency 






















• Great River Energy, Minnesota. In 2005, Great River 
Energy emphasized cost-effective energy conservation by 
offering appliance rebates to cooperative members who 
purchase ENERGY STAR qualifying refrigerators, clothes 
washers, and dishwashers. Great River provided its mem¬ 
ber cooperatives with nearly $2 million for energy conser¬ 
vation rebates and grants, including the ENERGY STAR 
rebates, as a low-cost resource alternative to building new 
peaking generation. In addition to several off-peak pro¬ 
grams, Great River Energy's residential DSM/conserva- 
tion program consists of: 

— Cycled air conditioning 

— Interruptible commercial load response/management 

— Interruptible irrigation 

— Air and ground source heat pumps 

— ENERGY STAR high-efficiency air conditioning rebate 

— ENERGY STAR appliance rebates 

— ENERGY STAR compact fluorescent lamp rebate 

— Low-income air conditioning tune-ups 

— Residential and commercial energy audits 
Keep Participation Simple 

Successful programs keep participation simple for both 
customers and trade allies. Onerous or confusing partic¬ 
ipation rules, procedures, and paperwork can be a major 
deterrent to participation from trade allies and cus¬ 
tomers. Applications and other forms should be clear 
and require the minimum information (equipment and 
customer) to confirm eligibility and track participation by 
customer for measurement and verification (M&V) pur¬ 
poses. Given that most energy efficiency improvements 
are made at the time of either equipment failure or 
retrofit, timing can be critical. A program that potential¬ 
ly delays equipment installation or requires customer or 
contractor time for participation will have fewer 


A Seattle City Light Example of a 
Simple Program 

Seattle City Light's Smart Business program offers 
a "per-fixture" rebate for specific fixtures in existing 
small businesses. Customers can use their own 
licensed electrical contractor or select from a pre¬ 
approved contractor list. Seattle City Light provides 
the rebate to either the installer or participating 
customer upon completion of the work. Completed 
work is subject to onsite verification. 

Since 1986, Seattle City Light's Smart Business 
program has cumulative savings (for all meas¬ 
ures) of 70,382 MWh and 2.124 MW. 

Source: Seattle City Light, 2005 

participants (and less support from trade allies). Seattle 
City Light's program shown above has two paths for easy 
participation. 

Keep Funding (and Other Program Characteristics) 
as Consistent as Possible 

Over time, both customers and trade allies become 
increasingly aware and comfortable with programs. 
Disruptions to program funding frustrate trade allies 
who cannot stock appropriately or are uncomfortable 
making promises to customers regarding program offer¬ 
ings for fear that efficiency program administrators will 
be unable to deliver on services or financial incentives. 

Invest in Education, Training, and Outreach 

Some of the key barriers to investment in energy 
efficiency are informational. Education, outreach, and 
training should be provided to trade allies as well as 
customers. Some programs are information-only programs; 
some programs have educational components integrated 
into the program design and budget; and in some 
cases, education is budgeted and delivered somewhat 
independently of specific programs. In general, stand¬ 
alone education programs do not comprise more than 


To create a sustainable, aggressive national commitment to energy efficiency 


6-35 




10 percent of the overall energy efficiency budget, but 
information, training, and outreach might comprise a 
larger portion of some programs that are designed to 
affect long-term markets, when such activities are tied to 
explicit uptake of efficiency measures and practices. This 
approach might be particularly applicable in the early 
years of implementation, when information and training 
are most critical for building supply and demand for 
products and services over the longer term. KeySpan and 
Flex Your Power are examples of coordinating education, 
training, and outreach activities with programs. 

Leverage Customer Contact to Sell Additional Efficiency 
and Conservation Measures 

Program providers can take advantage of program contact 
with customers to provide information on other program 

KeySpan Example 

KeySpan uses training and certification as critical parts 
of its energy efficiency programs. KeySpan provides 
building operator certification training, provides 
training on the Massachusetts state building code, 
and trains more than 1,000 trade allies per year. 

Source: Johnson, 2006 


California: Flex Your Power Campaign 

The California Flex Your Power Campaign was ini¬ 
tiated in 2001 in the wake of California's rolling 
black-outs. While initially focused on immediate 
conservation measures, the campaign has transi¬ 
tioned to promoting energy efficiency and long¬ 
term behavior change. The program coordinates 
with the national ENERGY STAR program as well as 
the California investor-owned utilities to ensure 
that consumers are aware of energy efficiency 
options and the incentives available to them 
through their utilities. 


offerings, as well as on no or low-cost opportunities to /jj 
reduce energy costs. Information might include proper use 
or maintenance of newly purchased or installed equipment 
or general practices around the home or workplace for 
efficiency improvements. Education is often included in 
low-income programs, which generally include direct 
installation of equipment, and thus already include in-home 
interaction between the program provider and customer. 
The box below provides some additional considerations for 
low-income programs. 

Leverage Private-Sector Expertise, External Funding, 
and Financing 

Well-designed energy efficiency programs leverage 
external funding and financing to stretch available dollars 
and to take advantage of transactions as they occur in 

Low-Income Programs 

Most utilities offer energy efficiency programs targeted 

to low-income customers for multiple reasons: 

• Low-income customers are less likely to take 
advantage of rebate and other programs, 
because they are less likely to be purchasing 
appliances or making home improvements. 

•The "energy burden" (percent of income spent 
on energy) is substantially higher for low-income 
customers, making it more difficult to pay bills. 
Programs that help reduce energy costs reduce 
the burden, making it easier to maintain regular 
payments. 

• Energy efficiency improvements often increase 
the comfort and safety of these homes. 

• Utilities have the opportunity to leverage federal 
programs, such as LIHEAP and WAP, to provide 
comprehensive services to customers. 

• Low-income customers often live in less efficient 
housing and have older, less efficient appliances. 

• Low-income customers often comprise a sub¬ 
stantial percentage (up to one-third) of utility 
residential customers and represent a large 
potential for efficiency and demand reduction. 

• Using efficiency education and incentives in 
conjunction with credit counseling can be very 
effective in this sector. 


6-36 National Action Plan for Energy Efficiency 










the marketplace. This approach offers greater financial 
incentives to the consumer without substantially increas¬ 
ing program costs. It also has some of the best practice 
attributes discussed previously, including use of existing 
channels and infrastructure to reach customers. The fol¬ 
lowing are a few opportunities for leveraging external 
funding and financing: 

• Leverage Manufacturer and Retailer Resources Through 
Cooperative Promotions. For example, for mass market 
lighting and appliance promotions, many program 
administrators issue RFPs to retailers and manufacturers 
asking them to submit promotional ideas. These RFPs 
usually require cost sharing or in-kind advertising and 
promotion, as well as requirements that sales data be 
provided as a condition of the contract. This approach 
allows competitors to differentiate themselves and 
market energy efficiency in a way that is compatible 
with their business model. 

• Leverage State and Federal Tax Credits Where Available. 

Many energy efficiency program administrators are 
now pointing consumers and businesses to the new 
federal tax credits and incorporating them in their pro¬ 
grams. In addition, program administrators can edu¬ 
cate their customers on existing tax strategies, such as 
accelerated depreciation and investment tax strategies, 
to help them recoup the costs of their investments 
faster. Some states offer additional tax credits, and/or 
offer sales tax "holidays," where sales tax is waived at 
point of sale for a specified period of time ranging from 
one day to a year. The North Carolina Solar Center 
maintains a database of efficiency incentives, including 
state and local tax incentives, at vwvw.dsireusa.org. 

• Build on ESCO and Other Financing Program Options. 
This is especially useful for large commercial and 
industrial projects. 

The NYSERDA and California programs presented at 
right and on the following page are both good examples 
of leveraging the energy services market and increasing 
ESCO presence in the state. 


New York Energy Smart Commercial/ 
Industrial Performance Program 

The New York Energy Smart Commercial/Industrial 
Performance Program, which is administered by 
NYSERDA, is designed to promote energy savings 
and demand reduction through capital improve¬ 
ment projects and to support growth of the energy 
service industry in New York state. Through the 
program, ESCOs and other energy service 
providers receive cash incentives for completion of 
capital projects yielding verifiable energy and 
demand savings. By providing $111 million in per¬ 
formance-based financial incentives, this nationally 
recognized program has leveraged more than 
$550 million in private capital investments. M&V 
ensures that electrical energy savings are achieved. 
Since January 1999, more than 860 projects 
were completed in New York with an estimat¬ 
ed savings of 790 million kWh/yr. 

Sources: Thorne-Amann and Mendelsohn, 2005; 
AESP, 2006 


• Leverage Organizations and Outside Education and 
Training Opportunities. Many organizations provide 
education and training to their members, sometimes 
on energy efficiency. Working with these organizations 
provides access to their members, and the opportunity 
to leverage funding or marketing opportunities provided 
by these organizations. 

In addition, the energy efficiency contracting industry 
has matured to the level that many proven programs 
have been "commoditized." A number of private firms 
and not-for-profit entities deliver energy efficiency pro¬ 
grams throughout the United States or in specific 
regions of the country. "The energy efficiency industry is 
now a $5 billion to $25 billion industry (depending on 
how expansive one's definition) with a 30-year history of 
developing and implementing all types of programs for 


To create a sustainable, aggressive national commitment to energy efficiency 


6-37 


California Non-Residential Standard 
Performance Contract (NSPC) Program 

The California NSPC program is targeted at cus¬ 
tomer efficiency projects and is managed on a 
statewide basis by PG&E, SCE, and San Diego Gas 
& Electric. Program administrators offer fixed-price 
incentives (by end use) to project sponsors for 
measured kilowatt-hour energy savings achieved 
by the installation of energy efficiency measures. 
The fixed price per kWh, performance measurement 
protocols, payment terms, and other operating 
rules of the program are specified in a standard 
contract. This program has helped to stimulate the 
energy services market in the state. In program 
year 2003, the California NSPC served 540 cus¬ 
tomers and saved 336 gigawatt-hours and 
6.54 million therms. 

Source: Quantum Consulting Inc., 2004 


utilities and projects for all types of customers across the 
country" (NAESCO, 2005). These firms can quickly get a 
program up and running, as they have the expertise, 
processes, and infrastructure to handle program activi¬ 
ties. New program administrators can contract with 
these organizations to deliver energy efficiency program 
design, delivery, and/or implementation support in their 
service territory. 

Fort Collins Utilities was able to achieve early returns for 
its Lighting with a Twist program (discussed on page 6- 
39) by hiring an experienced implementation contractor 
through a competitive solicitation process and negotiating 
cooperative marketing agreements with national retail chains 
and manufacturers, as well as local hardware stores. 


The Building Owners & Managers 
Association (BOMA) Energy Efficiency 
Program 

The BOMA Foundation, in partnership with the 
ENERGY STAR program, has created an innovative 
operational excellence program to teach property 
owners and managers how to reduce energy con¬ 
sumption and costs with proven no- and low-cost 
strategies for optimizing equipment, people and 
practices. The BOMA Energy Efficiency Program 
consists of six Web-assisted audio seminars (as well 
as live offerings at the BOMA International 
Convention). The courses are taught primarily by 
real estate professionals who speak in business 
vernacular about the process of improving 
performance. The courses are as follows: 

• Introduction to Energy Performance 

• How to Benchmark Energy Performance 

•Energy-Efficient Audit Concepts & Economic 
Benefits 

• No- and Low-Cost Operational Adjustments to 
Improve Energy Performance 

•Valuing Energy Enhancement Projects & Financial 
Returns 

•Building an Energy Awareness Program 

The commercial real estate industry spends 
approximately $24 billion annually on energy and 
contributes 18 percent of the U.S. CO 2 emissions. 
According to EPA and ENERGY STAR Partner 
observations, a 30 percent reduction is readily 
achievable simply by improving operating standards. 


6-38 National Action Plan for Energy Efficiency 





Fort Collins Utilities Lighting 
With a Twist 

Fort Collins Utilities estimates annual savings 
of 2,023 MWh of electricity with significant 
winter peak demand savings of 1,850 kW at a 
total resource cost of $0.018/kWh from its 
Lighting with a Twist program, which uses 
ENERGY STAR as a platform. The program was 
able to get off to quick and successful start by hiring 
an experienced implementation contractor and 
negotiating cooperative marketing agreements 
with retailers and manufacturers—facilitating the 
sale of 78,000 compact fluorescent light bulbs 
through six retail outlets from October to 
December 2005 (Fort Collins Utilities, et al., 2005). 

Start Simply With Demonstrated Program Models: 
Build Infrastructure for the Future 

Utilities starting out or expanding programs should look to 
other programs in their region and throughout the country 
to leverage existing and emerging best programs. After 
more than a decade of experience running energy efficiency 
programs, many successful program models have emerged 
and are constantly being refined to achieve even more cost- 
effective results. 

While programs must be adapted to local realities, utilities 
and state utility commissions can dramatically reduce their 
learning curve by taking advantage of the wealth of data 
and experience from other organizations around the 
country. The energy efficiency and services community has 
numerous resources and venues for sharing information 
and formally recognizing best practice programs. The 
Association of Energy Service Professionals ( www.aesp.org ), 
the Association of Energy Engineers ( www.aeecenter.org ), 
and the American Council for an Energy Efficient Economy 
(■ www.aceee.org ) are a few of these resources. 
Opportunities for education and information sharing are 
also provided via national federal programs such as ENERGY 
STAR ( www.energystar.gov ) and the Federal Energy 


Management Program ( www.eere.energy.gov/femp). 
Additional resources will be provided in Energy Efficiency 
Best Practices Resources and Expertise (a forthcoming 
product of the Leadership Group). Leveraging these 
resources will reduce the time and expense of going to 
market with new efficiency programs. This will also increase 
the quality and value of the programs implemented. 

Start With Demonstrated Program Approaches That Can 
Easily Be Adapted to New Localities 
Particularly for organizations that are new to energy effi¬ 
ciency programming or have not had substantial energy 
efficiency programming for many years, it is best to start 
with tried and true programs that can easily be transferred 
to new localities, and be up and running quickly to achieve 
near term results. ENERGY STAR lighting and appliance pro¬ 
grams that are coordinated and delivered through retail 
sales channels are a good example of this approach on the 
residential side. On the commercial side, prescriptive incen¬ 
tives for technologies such as lighting, packaged unitary 
heating and cooling equipment, commercial food service 
equipment, and motors are good early targets. While issues 
related to installation can emerge, such as design issues for 
lighting, and proper sizing issues for packaged unitary heat¬ 
ing and cooling equipment, these technologies can deliver 
savings independent from how well the building's overall 
energy system is managed and controlled. In the early 
phase of a program, offering prescriptive rebates is simple 
and can garner supplier interest in programs, but as 
programs progress, rebates might need to be reduced or 
transitioned to other types of incentives (e.g., cooperative 
marketing approaches, customer referrals) or to more 
comprehensive approaches to achieving energy savings. If 
the utility or state is in a tight supply situation, it might make 
sense to start with proven larger scale programs that 
address critical load growth drivers such as increased air 
conditioning load from both increased central air 
conditioning in new construction and increased use of 
room air conditioners. 

Determine the Right Incentives and Levels 

There are many types of incentives that can be used to 
spur increased investment in energy-efficient products 
and services. With the exception of education and 


To create a sustainable, aggressive national commitment to energy efficiency 


6-39 








Table 6-11. Types of Financial Incentives 


Financial Incentives 

Description 

Prescriptive Rebate 

Usually a predetermined incentive payment per item or per kW or kWh saved. Can be 
provided to the customer or a trade ally. 

Custom Rebate 

A rebate that is customized by the type of measures installed. Can be tied to a specific 
payback criteria or energy savings. Typically given to the customer. 

Performance Contracting Incentive 

A program administrator provides an incentive to reduce the risk premium to the ESCO 
installing the measures. 

Low Interest Financing 

A reduced interest rate loan for efficiency projects. Typically provided to the customer. 

Cooperative Advertising 

Involves providing co-funding for advertising or promoting a program or product. Often 
involves a written agreement. 

Retailer Buy Down 

A payment to the retailer per item that reduces the price of the product. 

MW Auction 

A program administrator pays a third party per MW and/or per MWh for savings. 


In many markets—even those with well established effi¬ 
ciency programs—it is often this lack of infrastructure or 
supply of qualified workers that prevents wider deploy¬ 
ment of otherwise cost-effective energy efficiency 
programs. Energy efficiency program administrators 
often try to address this lack of infrastructure through 
various program strategies, including pilot testing 
programs that foster demand for these services and help 
create the business case for private sector infrastructure 
development, and vocational training and outreach to 
universities, with incentives or business referrals to spur 
technician training and certification. 

Examples of programs that have leveraged the ESCO 
industry were provided previously. One program with an 
explicit goal of encouraging technical training for the 
residential marketplace is Home Performance with 
ENERGY STAR, which is an emerging program model 
being implemented in a number of states including 
Wisconsin, New York, and Texas (see box on page 6-41 
for an example). The program can be applied in the gas 
or electric context, and is effective at reducing peak 
load, because the program captures improvements in 
heating and cooling performance. 

part of the program design. 


training programs, most programs offer some type of 
financial incentive. Table 6-11 shows some of the most 
commonly used financial incentives. Getting incentives 
right, and at the right levels, ensures program success and 
efficient use of resources by ensuring that programs do 
not "overpay" to achieve results. The market assessment 
and stakeholder input process can help inform initial 
incentives and levels. Ongoing process and impact 
evaluation (discussed below) and reassessment of cost- 
effectiveness can help inform when incentives need to be 
changed, reduced, or eliminated. 

Invest in the Service Industry Infrastructure 

Ultimately, energy efficiency is implemented by people— 
home performance contractors, plumbers, electricians, 
architects, ESCOs, product manufacturers, and others— 
who know how to plan for, and deliver, energy efficiency 
to market. 

While it is a best practice to incorporate whole house 
and building performance into programs, these pro¬ 
grams cannot occur unless the program administrator 
has a skilled, supportive community of energy service 
professionals to call upon to deliver these services to 
market. In areas of the country lacking these talents, 
development of these markets is a key goal and critical 





6-40 National Action Plan for Energy Efficiency 




















Austin Energy: Home Performance 
with ENERGY STAR 

In Texas, Austin Energy's Home Performance with 
ENERGY STAR program focuses on educating cus¬ 
tomers, and providing advanced technical training 
for professional home performance contractors to 
identify energy efficiency opportunities, with an 
emphasis on safety, customer comfort, and energy 
savings. Participating Home Performance contrac¬ 
tors are given the opportunity to receive technical 
accreditation through the Building Performance 
Institute. 

Qualified contractors perform a top-to-bottom 
energy inspection of the home and make cus¬ 
tomized recommendations for improvements. 
These improvements might include measures such 
as air-sealing, duct sealing, adding insulation, 
installing energy efficient lighting, and installing 
new HVAC equipment or windows, if needed. In 
2005, Austin Energy served more than 1,400 
homeowners, with an average savings per cus¬ 
tomer of $290 per year. Collectively, Austin 
Energy customers saved an estimated 
$410,000 and more than 3 MW through the 
Home Performance with ENERGY STAR program. 

Source: Austin Energy, 2006 

Evolve to More Comprehensive Programs 

A sample of how program approaches might evolve over 
time is presented in Table 6-12. As this table illustrates, 
programs typically start with proven models and often 
simpler approaches, such as providing prescriptive 
rebates for multiple technologies in commercial/industrial 
existing building programs. In addition, early program 
options are offered for all customer classes, and all of the 
programs deliver capacity benefits in addition to energy 
efficiency. Ultimately, the initial approach taken by a 
program administrator will depend on how quickly the 
program needs to ramp up, and on the availability of 


service industry professionals who know how to plan for, 
and deliver, energy efficiency to market. 

As program administrators gain internal experience and 
a greater understanding of local market conditions, and 
regulators and stakeholders gain greater confidence in 
the value of the energy efficiency programs being 
offered, program administrators can add complexity to 
the programs provided and technologies addressed. The 
early and simpler programs will help establish internal 
relationships (across utility or program provider depart¬ 
ments) and external relationships (between program 
providers, trade allies and other stakeholders). Both the 
program provider and trade allies will better understand 
roles and relationships, and trade allies will develop 
familiarity with program processes and develop trust in 
the programs. Additional complexity can include alternative 
financing approaches (e.g., performance contracting), 
the inclusion of custom measures, bidding programs, 
whole buildings and whole home approaches, or addi¬ 
tional cutting edge technologies. In addition, once 
programs are proven within one subsector, they can 
often be offered with slight modification to other sectors; 
for example, some proven residential program offerings 
might be appropriate for multi-family or low-income cus¬ 
tomers, and some large commercial and industrial offerings 
might be appropriate for smaller customers or multifamily 
applications. Many of the current ENERGY STAR market- 
based lighting and appliance programs that exist in 
many parts of the country evolved from customer-based 
lighting rebates with some in-store promotion. Many of 
the more complex commercial and industrial programs, 
such at NSTAR and National Grid's Energy Initiative program 
evolved from lighting, HVAC, and motor rebate programs. 

The Wisconsin and Xcel Energy programs discussed on 
page 6-43 are also good examples of programs that 
have become more complex over time. 

Change Measures Over Time 

Program success, changing market conditions, changes 
in codes, and changes in technology require reassessing 
the measures included in a program. High saturations in 
the market, lower incremental costs, more rigid codes, or 


To create a sustainable, aggressive national commitment to energy efficiency 


6-41 



Table 6-12. Sample Progression of Program Designs 


Sector 




Enerav & Environmental Co-Benefits 

Program Ramp Up 

mi 

(In Addition to kWh) 


Early 

(6 Months -2 YRS) 

Midterm 
(2-3 YRS) 

Longer Term 
(3 To 7 YRS) 

Other Fuels 

Peak 

(S = Summer, 
W = Winter) 

Water 

Savings 

Other 

Residential: 

Market-based 



X 

S,W 

X 

Bill savings and 

Existing Homes 

lighting & appliance 
program 






reduced emissions 


Home performance 

Home performance 


X 

s,w 




with ENERGY STAR 
pilot 

with ENERGY STAR 







HVAC rebate 

Add HVAC practices 

X 

s 



Residential: 

ENERGY STAR 

ENERGY STAR 


X 

s,w 

X 

Bill savings and 

New 

Homes pilot (in areas 

Homes 





reduced emissions 

Construction 

without existing 
infrastructure) 


Add ENERGY STAR 
Advanced Lighting 
Package 


s,w 



Low-Income 

Education and 



X 

w 


Bill savings and 


coordination with 
weatherization 






reduced emissions 


programs 

Direct install 


X 

s,w 

X 

Improved bill 
payment 




Add home repair 




Improved comfort 

Multifamily 

Lighting, audits 




s,w 


Bill savings and 
reduced emissions 



Direct install 


X 

s,w 



Commercial: 

Lighting, motors, 




s,w 


Bill savings and 

Existing 

HVAC, pumps, 






reduced emissions 

Buildings 

refrigeration, food 
service equipment 
prescriptive rebates 

Custom measures 



s,w 

X 



ESCO-type program 


Comprehensive 

approach 





Commercial: 

Lighting, motors, 




s,w 


Bill savings and 

New 

HVAC, pumps, 






reduced emissions 

Construction 

refrigeration, food 
service equipment 
prescriptive rebates 

Custom measures 








and design 
assistance 



s,w 

X 


Small Business 

Lighting and 




s,w 


Bill savings and 


HVAC rebates 

Direct install 



s,w 


reduced emissions 


the availability of newer, more efficient technologies are 
all reasons to reassess what measures are included in a 
program. Changes can be incremental, such as limiting 
incentives for a specific measure to specific markets or 


specific applications. As barriers hindering customer 
investment in a measure are reduced, it might be appro¬ 
priate to lower or eliminate financial incentives altogether. 
It is not uncommon, however, for programs to continue 


6-42 National Action Plan for Energy Efficiency 























Wisconsin Focus on Energy: 
Comprehensive Commercial Retrofit 
Program 

Wisconsin Focus on Energy's Feasibility Study Grants 
and Custom Incentive Program encourages commer¬ 
cial customers to implement comprehensive, multi¬ 
measure retrofit projects resulting in the long-term, 
in-depth energy savings. Customers implementing 
multi-measure projects designed to improve the whole 
building might be eligible for an additional 30 percent 
payment as a comprehensive bonus incentive. The 
Comprehensive Commercial Retrofit Program 
saved 70,414,701 kWh, 16.4 MW, and 2 million 
therms from 2001 through 2005. 

Sources: Thorne-Amann and Mendelsohn, 2005; 
Wisconsin, 2006. 

Xcel Energy Design Assistance 

Energy Design Assistance offered by Xcel, targets 
new construction and major renovation projects. The 
program goal is to improve the energy efficiency of 
new construction projects by encouraging the design 
team to implement an integrated package of energy 
efficient strategies. The target markets for the pro¬ 
gram are commercial customers and small business 
customers, along with architectural and engineering 
firms. The program targets primarily big box retail, 
public government facilities, grocery stores, health¬ 
care, education, and institutional customers. The 
program offers three levels of support depending on 
project size. For projects greater than 50,000 square 
feet, the program offers custom consulting. For proj¬ 
ects between 24,000 and 50,000 square feet, the 
program offers plan review. Smaller projects get a 
standard offering. The program covers multiple 
F1VAC, lighting, and building envelope measures. 
The program also addresses industrial process 
motors and variable speed drives. Statewide, the 
Energy Design Assistance program saved 54.3 
GWh and 15.3 MW at a cost of $5.3 million in 2003. 

Source: Minnesota Office of Legislative Auditor, 
2005; Quantum Consulting Inc., 2004 


monitoring product and measure uptake after programs 
have ceased or to support other activities, such as con¬ 
tinued education, to ensure that market share for products 
and services are not adversely affected once financial 
incentives are eliminated. 

Pilot New Program Concepts 

New program ideas and delivery approaches should be ini¬ 
tially offered on a pilot basis. Pilot programs are often very 
limited in duration, geographic area, sector or technology, 
depending upon what is being tested. There should be a 
specific set of questions and objectives that the pilot pro¬ 
gram is designed to address. After the pilot period, a quick 
assessment of the program should be conducted to deter¬ 
mine successful aspects of the program and any problem 
areas for improvement, which can then be addressed in a 
more full-scale program. The NSTAR program shown 
below is a recent example of an emerging program type 
that was originally started as a pilot. 

Table 6-13 provides a summary of the examples pro¬ 
vided in this section. 


NSTAR Electric's ENERGY STAR 
Benchmarking Initiative 

NSTAR is using the ENERGY STAR benchmarking 
and portfolio manager to help its commercial cus¬ 
tomers identify and prioritize energy efficiency 
upgrades. NSTAR staff assist the customer in using 
the ENERGY STAR tools to rate their building relative 
to other buildings of the same type, and identify 
energy efficiency upgrades. Additional support is 
provided through walk-through energy audits and 
assistance in applying for NSTAR financial incentive 
programs to implement efficiency measures. 

Ongoing support is available as participants monitor 
the impact of the energy efficiency improvements 
on the building's performance. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-43 



Table 6-13. Program Examples for Key Customer Segments 


/i 


Customer 

Segment 

Program 

Program 

Administrator 

Program Description/ 
Strategies 

Program Model 
Proven Emerging 

Key Best 
Practices 

All 

Training and 
certification 
components 

KeySpan 

KeySpan's programs include a signifi¬ 
cant certification and training compo¬ 
nent. This includes building operator 
certification, building code training and 
training for HVAC installers. Strategies 
include training and certification. 


X 

Don't underinvest in 
education, training, and 
outreach. Solicit stake¬ 
holder input. Use utilities 
channels and brand. 

Commercial, 

Industrial 

Non-residential 

performance 

contracting 

program 

California Utilities 

This program uses a standard contract 
approach to provide incentives for 
measured energy savings. The key 
strategy is the provision of financial 
incentives. 

X 


Build upon ESCO and 
other financing program 
options. Add program 
complexity over time. 
Keep participation 
simple. 

Commercial, 

Industrial, 

New 

Construction 

Energy design 
assistance 

XCEL 

This program targets new construction 
and major renovation projects. Key 
strategies are incentives and design 
assistance for electric saving end uses. 

X 


Keep participation simple. 
Add complexity over 
time. 

Commercial, 

Industrial 

Custom incentive 
program 

Wisconsin Focus on 
Energy 

This program allows commercial and 
industrial customers to implement a 
wide array of measures. Strategies 
include financial assistance and 
technical assistance. 

X 


Keep participation simple. 
Add complexity over 
time. 

Large 

Commercial, 

Industrial 

NY Performance 

Contracting 

Program 

NYSERDA 

Comprehensive Performance 

Contracting Program provides incen¬ 
tives for measures and leverages the 
energy services sector. The predomi¬ 
nant strategies are providing incen¬ 
tives and using the existing energy 
services infrastructure. 

X 

Does allow for 
technologies 
to be added 
over time 

Leverage customer con¬ 
tact to sell additional 
measures. Add program 
complexity over time. 

Keep participation simple. 
Build upon ESCO and 
other financing options. 

Large 

Commercial, 

Industrial 

ENERGY STAR 
Benchmarking 

NSTAR 

NSTAR uses EPA's ENERGY STAR 
benchmarking and Portfolio Manager 
to assist customers in rating their 
buildings. 

X 


Coordinate with other 
programs. Keep partici¬ 
pation simple. Use utility 
channels and brand. 
Leverage ENERGY STAR. 

Small 

Commercial 

Smart business 

Seattle City Light 

This program has per unit incentives 
for fixtures and is simple to participate 
in. It also provides a list of pre¬ 
qualified contractors. 

X 


Use utility channels and 
brand. Leverage cus¬ 
tomer contact to sell 
additional measures. 

Keep funding consistent. 

Residential 

Flex Your Power 

California lOU's 

This is an example of the CA utilities 
working together on a coordinated cam¬ 
paign to promote ENERGY STAR prod¬ 
ucts. Lighting and appliances were 
among the measures promoted. 

Strategies include incentives and 
advertising. 

X 


Don't underinvest in edu¬ 
cation, training, and out¬ 
reach. Solicit stakeholder 
input. Use utilities chan¬ 
nels and brand. 

Coordinate with other 
programs. Leverage man¬ 
ufacturer and retailer 
resources. Keep participa¬ 
tion simple. Leverage 
ENERGY STAR. 

Residential • 
Low Income 

Residential 

affordability 

program 

LI PA 

Comprehensive low-income program 
that installs energy saving measures and 
also provides education. Strategies are 
incentives and education. 

X 


Coordinate with other 
programs. Keep participa¬ 
tion simple. Leverage 
customer contact to sell 
additional measures. 


6-44 National Action Plan for Energy Efficiency 


I 



































T3bl6 6-13. Program Examples for Key Customer Segments (continued) 


Customer 

Segment 

Program 

Program 

Administrator 

Program Description/ 
Strategies 

Program Model 

Key Best 
Practices 


Proven 

Emerging 

Residential 

Existing 

Homes 

Home 

Performance with 
ENERGY STAR 

Austin Energy 

Whole house approach to existing 
homes. Measures include: air sealing, 
insulation, lighting, duct-sealing, and 
replacing HVAC. 


X 

Start with proven mod¬ 
els. Use utilities channels 
and brand. Coordinate 
with other programs. 

Residential 

New 

Construction 

ENERGY STAR 
Homes 

Efficiency Vermont 

Comprehensive new construction pro¬ 
gram based on a HERS rating system. 
Measures include HVAC, insulation 
lighting, windows, and appliances. 

X 


Don't underinvest in 
education, training, and 
outreach. Solicit stake¬ 
holder input. Leverage 
state and federal tax 
credits. Leverage 

ENERGY STAR. 

Residential 

Existing 

Homes 

Residential 

program 

Great River Coop 

Provides rebates to qualifying appli¬ 
ances and technologies. Also provides 
training and education to customers 
and trade allies. Is a true dual-fuel 
program. 

X 


Start with proven mod¬ 
els. Use utilities chan¬ 
nels and brand. 

Coordinate with other 
programs. 

Residential 

Existing 

Homes 

New Jersey 

Clean Energy 
Program 

New Jersey BPU 

Provides rebates to qualifying appli¬ 
ances and technologies. Also provides 
training and education to customers 
and trade allies. Is a true dual-fuel 
program. 

X 


Start with proven mod¬ 
els. Coordinate with 
other programs. 

Commercial 

Existing 

Education and 
training 

BOMA 

Designed to teach members how to 
reduce energy consumption and costs 
through no- and low-cost strategies. 


X 

Leverage organizations 
and outside education 
and training opportuni¬ 
ties. Leverage ENERGY 
STAR. 


Ensuring Energy Efficiency 
Investments Deliver Results 

Program evaluation informs ongoing decision-making, 
improves program delivery, verifies energy savings claims, 
and justifies future investment in energy efficiency as a 
reliable energy resource. Engaging in evaluation during 
the early stages of program development can save time 
and money by identifying program inefficiencies, and sug¬ 
gesting how program funding can be optimized. It also 
helps ensure that critical data are not lost. 

The majority of organizations reviewed for this paper have 
formal evaluation plans that address both program 
processes and impacts. The evaluation plans, in general, 
are developed consistent with the evaluation budget cycle 
and allocate evaluation dollars to specific programs and 
activities. Process and impact evaluations are performed 
for each program early in program cycles. As programs 
and portfolios mature, process evaluations are less 
frequent than impact evaluations. Over the maturation 


period, impact evaluations tend to focus on larger 
programs (or program components), and address more 
complex impact issues. 

Most programs have an evaluation reporting cycle that is 
consistent with the program funding (or budgeting) cycle. 
In general, savings are reported individually by sector and 
totaled for the portfolio. Organizations use evaluation 
results from both process and impact evaluations to 
improve programs moving forward, and adjust their port¬ 
folio of energy efficiency offerings based on evaluation 
findings and other factors. Several organizations have 
adopted the International Performance Measurement and 
Verification Protocol (IPMVP) to provide guidelines for 
evaluation approaches. California has its own set of for¬ 
mal protocols that address specific program types. Key 
methods used by organizations vary based on program 
type and can include billing analysis, engineering analysis, 
metering, sales data tracking, and market effects studies. 

Table 6-14 summarizes the evaluation practices of a 
subset of the organizations reviewed for this study. 


To create a sustainable, aggressive national commitment to energy efficiency 


6-45 





















-14. Evaluation Approaches 



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create a sustainable, aggressive national commitment to energy efficiency 





































Best practices for program evaluation that emerge from 
review of these organizations include the following: 

•Budget, plan, and initiate evaluation from the onset. 

•Formalize and document evaluation plans. 

• Develop program tracking systems that are compatible 
with needs identified in evaluation plans. 

•Conduct process evaluations to ensure that programs 
are working efficiently. 

•Conduct impact evaluations to ensure that mid- and 
long-term goals are being met. 

•Communicate evaluation results. 

Budget, Plan, and Initiate Evaluation From 
the Onset 

A well-designed evaluation plan addresses program 
process and impact issues. Process evaluations address 
issues associated with program delivery such as marketing, 
staffing, paperwork flow, and customer interactions, to 
understand how they can be improved to better meet 
program objectives. Impact evaluations are designed to 
determine the energy or peak savings from the program. 
Sometimes evaluations address other program benefits 
such as non-energy benefits to consumers, water savings, 
economic impacts, or emission reductions. Market research 
is often included in evaluation budgets to assist in 
assessing program delivery options, and for establishing 
baselines. An evaluation budget of 3 to 6 percent of pro¬ 
gram budget is a reasonable spending range. Often eval¬ 
uation spending is higher in the second or third year of 

"We should measure the performance of DSM 
programs in much the same way and with the 
same competence and diligence that we monitor 
the performance of power plants." 



a program. Certain evaluation activities such as estab- 
lishing baselines are critical to undertake from the onset 
to ensure that valuable data are not lost. 

Develop Program and Project Tracking Systems 
That Support Evaluation Needs 

A well-designed tracking system should collect sufficiently 
detailed information needed for program evaluation and 
implementation. Data collection can vary by program 
type, technologies addressed, and customer segment; 
however, all program tracking systems should include: 

• Participating customer Information. At a minimum, 
create an unique customer identifier that can be linked 
to the utility's Customer Information System (CIS). 
Other customer or site specific information might be 
valuable. 

•Measure specific information. Record equipment type, 
equipment size or quantity, efficiency level and estimated 
savings. 

•Program tracking information. Track rebates or other 
program services provided (for each participant) and 
key program dates. 

•All program cost information. Include internal staffing 
and marketing costs, subcontractor and vendor costs, 
and program incentives. 

Efficiency Vermont's tracking system incorporates all of 
these features in a comprehensive, easy-to-use relational 
database that includes all program contacts including, 
program allies and customers, tracks all project savings 
and costs, shows the underlying engineering estimates 
for all measures, and includes billing data from all of the 
Vermont utilities. 


—Eric Hirst (1990), Independent Consultant 
and Former Corporate Fellow, Oak Ridge 
National Laboratory 


6-48 National Action Plan for Energy Efficiency 





Conduct Process Evaluations to Ensure Programs 
Are Working Efficiently 

Process evaluations are a tool to improve the design and 
delivery of the program and are especially important for 
newer programs. Often they can identify improvements 
to program delivery that reduce program costs, expedite 
program delivery, improve customer satisfaction, and 
better focus program objectives. Process evaluation can 
also address what technologies get rebates or determine 
rebate levels. Process evaluations use a variety of qualita¬ 
tive and quantitative approaches including review of pro¬ 
gram documents, in-depth interviews, focus groups, and 
surveys. Customer research in general, such as regular 
customer and vendor surveys, provides program admin¬ 
istrators with continual feedback on how the program is 
working and being received by the market. 

Conduct Impact Evaluations to Ensure Goals 
Are Being Met 

Impact evaluations measure the change in energy usage 
(kWh, kW, and therms) attributable to the program. 
They use a variety of approaches to quantify energy sav¬ 
ings including statistical comparisons, engineering esti¬ 
mation, modeling, metering, and billing analysis. The 
impact evaluation approach used is a function of the 
budget available, the technology(ies) addressed, the 
certainty of the original program estimates, and the level 
of estimated savings. The appliance recycling example 
shown at right is an example of how process and impact 
evaluations have improved a program over time. 

Measurement and Verification (M&V) 

The term "measurement and verification" is often 
used in regard to evaluating energy efficiency 
programs. Sometimes this term refers to ongoing 
M&V that is incorporated into program operations, 
such as telephone confirmation of installations by 
third-party installers or measurement of savings for 
selected projects. Other times, it refers to external 
(program operations) evaluations to document savings. 


California Residential Appliance 
Recycling Program (RARP) 

The California RARP was initially designed to 
remove older, inefficient second refrigerators from 
participant households. As the program matured, 
evaluations showed that the potential for removing 
old second refrigerators from households had 
decreased substantially as a result of the program. 
The program now focuses on pick-up of older 
refrigerators that are being replaced, to keep these 
refrigerators out of the secondary refrigerator market. 

Organizations are beginning to explore the use of the EPA 
Energy Performance Rating System to measure the energy 
performance at the whole-building level, complement 
traditional M&V measures, and go beyond component- 
by-component approaches that miss the interactive impacts 
of design, sizing, installation, controls, and operation and 
maintenance. 

While most energy professionals see inherent value in 
providing energy education and training (lack of infor¬ 
mation is often identified as a barrier to customer and 
market actor adoption of energy efficiency products and 
practices), few programs estimate savings directly as a 
result of education efforts. Until 2004, California 
assigned a savings estimate to the Statewide Education 
and Training Services program based on expenditures. 

Capturing the energy impacts of energy education pro¬ 
grams has proven to be a challenge for evaluators for 
several reasons. First, education and training efforts are 
often integral to specific program offerings. For example, 
training of FIVAC contractors on sizing air conditioners 
might be integrated into a residential appliance rebate 
program. Second, education and training are often a 
small part of a program in terms of budget and estimated 
savings. Third, impact evaluation efforts might be expensive 
compared to the education and training budget and 
anticipated savings. Fourth, education and training 
efforts are not always designed to achieve direct benefits. 
They are often designed to inform participants or market 
actors of program opportunities, simply to familiarize 
them with energy efficiency options. Most evaluations of 


To create a sustainable, aggressive national commitment to energy efficiency 


6-49 




Best Practices in Evaluation 


• Incorporating an overall evaluation plan and budget 
into the program plan. 

•Adopting a more in-depth evaluation plan each 
program year. 

• Prioritizing evaluation resources where the risks are 
highest. This includes focusing impact evaluation 
activities on the most uncertain outcomes and highest 
potential savings. New and pilot programs have the 
most uncertain outcomes, as do newer technologies. 

•Allowing evaluation criteria to vary across some 
program types to allow for education, outreach, 
and innovation. 

• Conducting ongoing verification as part of the 
program process. 

energy education and training initiatives have focused 
on process issues. Recently, there have been impact eval¬ 
uations of training programs, especially those designed 
to produce direct energy savings, such as Building 
Operator Certification. 

In the future, energy efficiency will be part of emissions 
trading initiatives (such as the Regional Greenhouse Gas 
Initiative [RGGI]) and is likely to be eligible for payments for 
reducing congestion and providing capacity value such as 
in the ISO-NE capacity market settlement. These emerging 
opportunities will require that evaluation methods become 
more consistent across states and regions, which might 
necessitate adopting consistent protocols for project-level 
verification for large projects, and standardizing sampling 
approaches for residential measures such as compact fluo¬ 
rescent lighting. This is an emerging need and should be a 
future area of collaboration across states. 

Communicate Evaluation Results to Key 
Stakeholders 

Communicating the evaluation results to program 
administrators and stakeholders is essential to enhancing 
program effectiveness. Program administrators need to 
understand evaluation approaches, findings, and espe¬ 
cially recommendations to improve program processes 


• Establishing a program tracking system that 
includes necessary information for evaluation. 



• Matching evaluation techniques to the situation in 
regards to the costs to evaluate, the level of precision 
required, and feasibility. 

• Maintaining separate staff for evaluation and for 
program implementation. Having outside review of 
evaluations (e.g., state utility commission), especially 
if conducted by internal utility staff. 


• Evaluating regularly to refine programs as needed 
(changing market conditions often require program 
changes). 


and increase (or maintain) program savings levels. 
Stakeholders need to see that savings from energy effi¬ 
ciency programs are realized and have been verified 
independently. 


Evaluation reports need to be geared toward the audi¬ 
ences reviewing them. Program staff and regulators 
often prefer reports that clearly describe methodologies, 
limitations, and findings on a detailed and program level. 
Outside stakeholders are more likely to read shorter eval¬ 
uation reports that highlight key findings at the cus¬ 
tomer segment or portfolio level. These reports must be 
written in a less technical manner and highlight the 
impacts of the program beyond energy or demand savings. 
For example, summary reports of the Wisconsin Focus 
on Energy programs highlight energy, demand, and 
therm savings by sector, but also discuss the environ¬ 
mental benefits of the program and the impacts of energy 
savings on the Wisconsin economy. Because the public 
benefits budget goes through the state legislature, the 
summary reports include maps of Wisconsin showing 
where Focus on Energy projects were completed. 
Examples of particularly successful investments, with the 
customer's permission, should be part of the evaluation. 
These case studies can be used to make the success 
more tangible to stakeholders. 




6-50 National Action Plan for Energy Efficiency 










Recommendations and Options 

The National Action Plan for Energy Efficiency Leadership 
Group offers the following recommendations as ways to 
promote best practice energy efficiency programs, and 
provides a number of options for consideration by utili¬ 
ties, regulators, and stakeholders. 

Recommendation: Recognize energy efficiency as a high- 
priority energy resource. Energy efficiency has not been 
consistently viewed as a meaningful or dependable 
resource compared to new supply options, regardless of 
its demonstrated contributions to meeting load growth. 
Recognizing energy efficiency as a high priority energy 
resource is an important step in efforts to capture the 
benefits it offers and lower the overall cost of energy 
services to customers. Based on jurisdictional objectives, 
energy efficiency can be incorporated into resource plans 
to account for the long-term benefits from energy sav¬ 
ings, capacity savings, potential reductions of air pollu¬ 
tants and greenhouse gases, as well as other benefits. 
The explicit integration of energy efficiency resources 
into the formalized resource planning processes that 
exist at regional, state, and utility levels can help estab¬ 
lish the rationale for energy efficiency funding levels and 
for properly valuing and balancing the benefits. In some 
jurisdictions, existing planning processes might need to 
be adapted or new planning processes might need to be 
created to meaningfully incorporate energy efficiency 
resources into resource planning. Some states have rec¬ 
ognized energy efficiency as the resource of first priority 
due to its broad benefits. 

Option to Consider: 

•Quantifying and establishing the value of energy effi¬ 
ciency, considering energy savings, capacity savings, 
and environmental benefits, as appropriate. 

Recommendation: Make a strong, long-term commit¬ 
ment to cost-effective energy efficiency as a resource. 
Energy efficiency programs are most successful and provide 
the greatest benefits to stakeholders when appropriate 
policies are established and maintained over the long¬ 
term. Confidence in long-term stability of the program 


will help maintain energy efficiency as a dependable 
resource compared to supply-side resources, deferring or 
even avoiding the need for other infrastructure invest¬ 
ments, and maintains customer awareness and support. 
Some steps might include assessing the long-term 
potential for cost-effective energy efficiency within a 
region (i.e., the energy efficiency that can be delivered 
cost-effectively through proven programs for each 
customer class within a planning horizon); examining the 
role for cutting-edge initiatives and technologies; estab¬ 
lishing the cost of supply-side options versus energy 
efficiency; establishing robust M&V procedures; and 
providing for routine updates to information on energy 
efficiency potential and key costs. 

Options to Consider: 

• Establishing appropriate cost-effectiveness tests for a 
portfolio of programs to reflect the long-term benefits 
of energy efficiency. 

• Establishing the potential for long-term, cost-effective 
energy efficiency savings by customer class through 
proven programs, innovative initiatives, and cutting- 
edge technologies. 

• Establishing funding requirements for delivering long¬ 
term, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part of 
energy planning processes. 

• Developing robust M&V procedures. 

• Designating which organization(s) is responsible for 
administering the energy efficiency programs. 

• Providing for frequent updates to energy resource plans 
to accommodate new information and technology. 

Recommendation: Broadly communicate the benefits of, 
and opportunities for, energy efficiency. Experience 
shows that energy efficiency programs help customers 
save money and contribute to lower cost energy 
systems. But these impacts are not fully documented nor 


To create a sustainable, aggressive national commitment to energy efficiency 


6-51 



recognized by customers, utilities, regulators, and policy¬ 
makers. More effort is needed to establish the business 
case for energy efficiency for all decision-makers, and to 
show how a well-designed approach to energy efficiency 
can benefit customers, utilities, and society by (1) reducing 
customers bills over time, (2) fostering financially healthy 
utilities (return on equity [ROE], earnings per share, debt 
coverage ratios), and (3) contributing to positive societal 
net benefits overall. Effort is also necessary to educate 
key stakeholders that, although energy efficiency can be 
an important low-cost resource to integrate into the 
energy mix, it does require funding, just as a new power 
plan requires funding. Further, education is necessary on 
the impact that energy efficiency programs can have in 
concert with other energy efficiency policies such as 
building codes, appliance standards, and tax incentives. 

Options to Consider: 

• Communicating the role of energy efficiency in lowering 
customer energy bills and system costs and risks over time. 

•Communicating the role of building codes, appliance 
standards, tax and other incentives. 

Recommendation: Provide sufficient and stable program 
funding to deliver energy efficiency where cost- 
effective. Energy efficiency programs require consistent 
and long-term funding to effectively compete with energy 
supply options. Efforts are necessary to establish this 
consistent long-term funding. A variety of mechanisms 
have been, and can be, used based on state, utility, and 
other stakeholder interests. It is important to ensure that 
the efficiency programs providers have sufficient pro¬ 
gram funding to recover energy efficiency program costs 
and implement the energy efficiency that has been 
demonstrated to be available and cost-effective. A number 
of states are now linking program funding to the 
achievement of energy savings. 

Option to Consider: 

• Establishing funding for multi-year periods. 




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6-52 National Action Plan for Energy Efficiency 





















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Mills, E. and Livingston, J. (2005, November 11). 

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To create a sustainable, aggressive national commitment to energy efficiency 


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Report Summary 



This report presents a variety of policy, planning, and program approaches that can be used to help natu¬ 
ral gas and electric utilities, utility regulators, and partner organizations pursue the National Action Plan 
for Energy Efficiency recommendations and meet their commitments to energy efficiency. This chapter 
summarizes these recommendations and the energy efficiency key findings discussed in this report. 


Overview 

This National Action Plan for Energy Efficiency (Action 
Plan) is a call to action to bring diverse stakeholders 
together at the national, regional, state, or utility level, 
as appropriate, to foster the discussions, decision¬ 
making, and commitments necessary to take investment 
in energy efficiency to a new level. The overall goal is to 
create a sustainable, aggressive national commitment to 
energy efficiency through gas and electric utilities, utility 
regulators, and partner organizations. 

Based on the policies, practices, and efforts of many 
organizations previously discussed in this report, the 
Leadership Group offers five recommendations as ways 
to overcome many of the barriers that have limited 
greater investment in programs to deliver energy effi¬ 
ciency to customers of electric and gas utilities (Figure 7-1). 
These recommendations may be pursued through a 
number of different options, depending on state and 
utility circumstances. 


As part of the Action Plan, leading organizations are 
committing to aggressively pursue energy efficiency 
opportunities in their organizations and to assist others 
who want to increase the use of energy efficiency in their 
regions. The commitments pursued under the Action Plan 
have the potential to save Americans many billions of dollars 
on energy bills over the next 10 to 15 years, contribute to 
energy security, and improve the environment. 

Recommendations and Options 
to Consider 

The Action Plan Report provides information on the bar¬ 
riers that limit greater investment in programs to deliver 
energy efficiency to customers of electric and gas utili¬ 
ties. Figure 7-2 illustrates the key barriers and how they 
relate to policy structure, utility resource planning, and 
program implementation. 


Figure 7-1. National Action Plan for Energy Efficiency Recommendations 


• Recognize energy efficiency as a high-priority energy resource. 

• Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities for energy efficiency. 

• Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective. 

• Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and 
modify ratemaking practices to promote energy efficiency investments. 


To create a sustainable, aggressive national commitment to energy efficiency 


7-1 













Several options exist for utilities, regulators, and partner 
organizations to overcome these barriers and pursue the 
Action Plan recommendations. Different state and utility 
circumstances affect which options are pursued. Table 7-1 
provides a list of the Leadership Group recommendations 
along with sample options to consider. The table also 
provides a cross reference to supporting discussions in 
Chapters 2 through 6 of this report. 


• Lower energy bills, greater customer control, and 
greater customer satisfaction. 

• Lower cost than only supplying new generation from 
new power plants. 

•Advantages from being modular and quick to deploy. 

• Significant energy savings. 


Key Findings 

The key finding of the Action Plan Report is that energy 
efficiency can be a cost-effective resource and can pro¬ 
vide multiple benefits to utilities, customers, and society. 
These benefits, also discussed in more detail in Chapter 
1: Introduction and Background, 1 include: 


• Environmental benefits. 

• Economic development opportunities. 

• Energy security. 


Figure 7-2: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency 


Timeline: Actions to Encourage Greater Energy Efficiency 



Utility Rpsourre 

Program 

Policy Structure 

Planning 

Implementation 

Develop Utility Incentives 
for Energy Efficiency 

Include Energy Efficiency 
in Utility Resource Mix 

Program Roll-out 

Develop Rate Designs to 
Encourage Energy Efficiency 

Develop Effective Energy 
Efficiency Programs 

Measurement & Evaluation 

i_ 

l 

_i 


Revise Plans and Policies Based on Results 


Action Plan Report Chapter Areas and Key Barriers 


Utility Ratemaking 
& Revenue 
Requirements 

Planning 

Processes 

Rate Design 

Model 

Program 

Documentation 

Energy efficiency reduces 
utility earnings 

Planning does not 
incorporate demand- 
side resources 

Rates do not 
encourage energy 
efficiency investments 

Limited information on 
existing best practices 


1 Chapter 6: Energy Efficiency Program Best Practices also provides more information on these benefits. 


7-2 National Action Plan for Energy Efficiency 























Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter 


Leadership Group 
Recommendations 

(With Options To Consider) 

Chapter 2: 
Utility 

Ratemaking & 
Revenue 
Requirements 

Chapter 3: 
Energy 
Resource 
Planning 
Processes 

Chapter 4: 
Business Case 
for Energy 
Efficiency 

Chapter 5: 
Rate Design 

Chapter 6: 

Energy 
Efficiency 
Program Best 
Practices 

Recognize energy efficiency as a high 
priority energy resource. 


X 



X 

Establishing policies to establish energy 
efficiency as a priority resource. 


X 




Integrating energy efficiency into utility, state, 
and regional resource planning activities. 


X 




Quantifying and establishing the value of energy 
efficiency, considering energy savings, capacity 
savings, and environmental benefits, as 
appropriate. 


X 



X 

Make a strong, long-term commitment 
to cost effective energy efficiency as a 
resource. 

X 

X 



X 

Establishing appropriate cost-effectiveness 
tests for a portfolio of programs to reflect the 
long-term benefits of energy efficiency. 


X 



X 

Establishing the potential for long-term, cost 
effective energy efficiency savings by customer 
class through proven programs, innovative 
initiatives, and cutting-edge technologies. 


X 



X 

Establishing funding requirements for delivering 
long-term, cost-effective energy efficiency. 

X 

X 



X 

Developing long-term energy saving goals as 
part of energy planning processes. 


X 



X 

Developing robust measurement and 
verification (M&V) procedures. 


X 



X 

Designating which organization(s) is responsi¬ 
ble for administering the energy efficiency 
programs. 

X 

X 



X 

Providing for frequent updates to energy 
resource plans to accommodate new 
information and technology. 


X 



X 

Broadly communicate the benefits of, 
and opportunities for, energy efficiency. 

X 

X 

X 

X 

X 

Establishing and educating stakeholders on the 
business case for energy efficiency at the state, 
utility, and other appropriate level addressing rele¬ 
vant customer, utility, and societal perspectives. 

X 

X 

X 



Communicating the role of energy efficiency 
in lowering customer energy bills and system 
costs and risks over time. 

X 

X 

X 

X 

X 

Communicating the role of building codes, 
appliance standards, and tax and other 
incentives. 





X 



To create a sustainable, aggressive national commitment to energy efficiency 


7-3 






























Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter (continued) 


i 


Leadership Group 
Recommendations 

(With Options To Consider) 

Chapter 2: 
Utility 

Ratemaking & 
Revenue 
Requirements 

Chapter 3: 
Energy 
Resource 
Planning 
Processes 

Chapter 4: 
Business Case 
for Energy 
Efficiency 

Chapter 5: 
Rate Design 

Chapter 6: 

Energy 
Efficiency 
Program Best 
Practices 

Provide sufficient, timely, and stable 
program funding to deliver energy 
efficiency where cost-effective. 

X 

X 



X 

Deciding on and committing to a consistent 
way for program administrators to recover 
energy efficiency costs in a timely manner. 

X 

X 




Establishing funding mechanisms for energy 
efficiency from among the available options 
such as revenue requirement or resource 
procurement funding, system benefits charges, 
rate-basing, shared-savings, incentive 
mechanisms, etc. 

X 

X 




Establishing funding for multi-year periods. 

X 

X 



X 

Modify policies to align utility incentives 
with the delivery of cost-effective energy 
efficiency and modify ratemaking 
practices to promote energy efficiency 
investments. 

X 



X 


Addressing the typical utility throughput 
incentive and removing other regulatory and 
management disincentives to energy efficiency. 

X 





Providing utility incentives for the successful 
management of energy efficiency programs. 

X 





Including the impact on adoption of energy 
efficiency as one of the goals of retail rate 
design, recognizing that it must be balanced 
with other objectives. 




X 


Eliminating rate designs that discourage energy 
efficiency by not increasing costs as customers 
consume more electricity or natural gas. 




X 


Adopting rate designs that encourage energy 
efficiency by considering the unique character¬ 
istics of each customer class and including 
partnering tariffs with other mechanisms that 
encourage energy efficiency, such as benefit 
sharing programs and on-bill financing. 




X 



7-4 National Action Plan for Energy Efficiency 



























As discussed in Chapter 2: Utility Ratemaking & Revenue 
Requirements, financial disincentives exist that hinder utilities 
from pursuing energy efficiency, even when cost-effective. 
Many states have experience in addressing utility financial 
disincentives in the following areas: 

•Overcoming the throughput incentive. 

• Providing reliable means for utilities to recover energy 
efficiency costs. 

• Providing a return on investment for efficiency programs 
that is competitive with the return utilities earn on new 
generation. 

•Addressing the risk of program costs being disallowed, 
along with other risks. 

• Recognizing the full value of energy efficiency to the 
utility system. 

Chapter 3: Energy Resource Planning Processes found that 
there are many approaches to navigate and overcome the 
barriers to incorporating energy efficiency in planning 
processes. Common themes across approaches include: 

• Cost and savings data for energy efficiency measures 
are readily available. 

• Energy, capacity, and non-energy benefits can justify 
robust energy efficiency programs. 

•A clear path to funding is needed to establish a budg¬ 
et for energy efficiency resources. 

• Parties should integrate energy efficiency early in the 
resource planning process. 

Based on the eight cases examined using the Energy 
Efficiency Benefits Calculator in Chapter 4: Business 
Case for Energy Efficiency, energy efficiency investments 
were found to provide consistently lower costs over time 
for both utilities and customers, while providing positive 
net benefits to society. Key findings include: 

• Ratemaking policies to address utility financial barriers 
to energy efficiency maintain utility health while com¬ 
prehensive, cost-effective energy efficiency programs 
are implemented. 


• The costs of energy efficiency and the reduction in utility 
sales volume initially raise gas or electricity bills due to 
slightly higher rates, but efficiency gains will reduce aver¬ 
age customer bills by 2 to 9 percent over a 10-year period. 

• Energy efficiency investments yielded net societal benefits 
on the order of hundreds of millions of dollars for each of 
the eight small- to medium-sized utility cases examined. 

Chapter 5: Rate Design found that recognizing the 
promotion of energy efficiency is an important factor to 
balance along with the numerous regulatory and legislative 
goals addressed during the complex rate design process. 
Additional key findings include: 

• Several rate design options exist to encourage customers 
to invest in efficiency and to participate in new programs 
that provide innovative technologies (e.g., smart meters). 

• Utility rates that are designed to promote sales or maxi¬ 
mize stable revenues tend to lower customer incentives 
to adopt energy efficiency. 

• Some rate forms, like declining block rates or rates with 
large fixed charges, reduce the savings that customers 
can attain from adopting energy efficiency. 

•Appropriate rate designs should consider the unique 
characteristics of each customer class. 

• Energy efficiency can be promoted through non-tariff 
mechanisms that reach customers through their utility bill. 

• More effort is needed to communicate the benefits 
and opportunities for energy efficiency to customers, 
regulators, and utility decision-makers. 

Chapter 6: Energy Efficiency Program Best Practices 
provided a summary of best practices, as well as general 
program key findings. The best practice strategies for 
program planning, design, implementation, and evalua¬ 
tion are found to be independent of the policy model in 
which the program operates. These best practices, 
organized by four major groupings, are provided below: 

• Making Energy Efficiency A Resource 
— Require leadership at multiple levels. 


To create a sustainable, aggressive national commitment to energy efficiency 


7-5 


& 


— Align organizational goals. 

— Understand the efficiency resource. 

•Developing An Energy Efficiency Plan 

— Offer programs for all key customer classes. 

— Align goals with funding. 

— Use cost-effectiveness tests that are consistent with 
long-term planning. 

Consider building codes and appliance standards 
when designing programs. 

— Plan to incorporate new technologies. 

— Consider efficiency investments to alleviate transmis¬ 
sion and distribution constraints. 

— Create a roadmap of key program components, 
milestones, and explicit energy use reduction goals. 

•Designing and Delivering Energy Efficiency Programs 

— Begin with the market in mind. 

— Leverage private sector expertise, external funding, 
and financing. 

— Start with demonstrated program models—build 
infrastructure for the future. 

• Ensuring Energy Efficiency Investments Deliver Results 

— Budget, plan, and initiate evaluation. 

Develop program and project tracking systems. 

— Conduct process evaluations. 


— Conduct impact evaluations. 

Communicate evaluation results to key stakeholders. 

The key program findings in Chapter 6 are drawn from the 

programs reviewed for this report.? These findings include: 

• Energy efficiency resources are being acquired on average 
at about one-half the cost of typical new power 
sources and about one-third of the cost of natural gas 
supply in many cases—contributing to an overall 
lower-cost energy system for rate-payers (EIA, 2006). 

• Many energy efficiency programs are being delivered at a 
total program cost of about $0.02 to $0.03 per lifetime 
kilowatt-hour (kWh) saved and $1.30 to $2.00 per life¬ 
time million British thermal units (MMBtu) saved. These 
costs are less than the avoided costs seen in most regions 
of the country. Funding for the majority of programs 
reviewed ranges from about 1 to 3 percent of electric 
utility revenue and 0.5 to 1 percent of gas utility revenue. 

• Even low energy cost states, such as those in the Pacific 
Northwest, have reason to invest in energy efficiency 
because energy efficiency provides a low-cost, reliable 
resource that reduces customer utility bills. Energy efficien¬ 
cy also costs less than constructing new generation and 
provides a hedge against market, fuel, and environmental 
risks (NWPCC, 2005). 

•Well-designed energy efficiency programs provide 
opportunities for customers of all types to adopt energy 
saving measures and reduce their energy bills. These 
programs can help customers make sound energy-use 
decisions, increase control over their energy bills, and 
empower them to manage their energy usage. 
Customers can experience significant savings depending 
on their own habits and the program offered. 

•Consistently funded, well-designed efficiency programs 
are cutting electricity and natural gas load—providing 
annual savings for a given program year of 0.15 to 1 
percent of energy sales. These savings typically will 


? See Chapter 6: Energy Efficiency Program Best Practices, Tables 6-2 and 6-3, for more information on energy efficiency programs reviewed. 


7-6 National Action Plan for Energy Efficiency 








accrue at this level for 10 to 15 years. These programs 
are helping to offset 20 to 50 percent of expected 
energy growth in some regions without compromising 
end-user activity or economic well being. 

• Research and development enables a continuing source of 
new technologies and methods for improving energy 
efficiency and helping customers control their energy bills. 

• Many state and regional studies have found that pursuing 
economically attractive, but as yet untapped, energy 
efficiency could yield more than 20 percent savings in total 
electricity demand nationwide by 2025. These savings 
could help cut load growth by half or more compared to 
current forecasts. Savings in direct use of natural gas could 
similarly provide a 50 percent or greater reduction in 
natural gas demand growth. Energy savings potential 
varies by customer segment, but there are cost-effective 
opportunities for all customer classes. 

• Energy efficiency programs are being operated successfully 
across many different contexts: regulated and unregulated 
markets; utility, state, or third-party administration; 
investor-, publicly-, and cooperatively-owned utilities; and 
gas and electric utilities. 

• Energy efficiency resources are being acquired through a 
variety of mechanisms including system benefits charges 
(SBC), energy efficiency portfolio standards (EEPS), and 
resource planning (or cost-of-service) efforts. 

•Cost-effective energy efficiency programs exist for 
electricity and natural gas, including programs that can 
be specifically targeted to reduce peak load. 


• Effective models exist for delivering gas and electric energy 
efficiency programs to all customer classes. Models might 
vary for some programs based on whether a utility is in the 
initial stages of energy efficiency programming or has been 
implementing programs for years. 

• Energy efficiency programs, projects, and policies benefit 
from established and stable regulations, clear goals, and 
comprehensive evaluation. 

• Energy efficiency programs benefit from committed 
program administrators and oversight authorities, as 
well as strong stakeholder support. 

• Most large-scale energy efficiency programs have 
improved productivity, enabling job growth in the 
commercial and industrial sectors. 

• Large-scale energy efficiency programs can reduce 
wholesale market prices. 

References 


Northwest Power and Conservation Council [NWPCC] 
(2005, May). The 5th Northwest Electric Power and 
Conservation Plan, <http://www.nwcouncil.org/energy/ 
powerplan/default.htmx 

U.S. Energy Information Administration [EIA] (2006). 
Annual Energy Outlook 2006. Washington, DC. 


To create a sustainable, aggressive national commitment to energy efficiency 


7-7 








Additional Guidance 

Appendix OPI Removing the 

A: Throughput Incentive 

The National Action Plan for Energy Efficiency provides policy recommendations and options to support a 
strong commitment to cost-effective energy efficiency in the United States. One policy that receives a 
great deal of attention is reducing or eliminating the financial incentive for a utility to sell more 
energy—the throughput incentive. Options exist to address the throughput incentive, as discussed in more 
detail in this appendix. 



Overview 

In order to eliminate the conflict between the public 
service objectives of least-cost service on the one hand, 
and a utility's profitability objectives on the other hand, 
it is necessary to remove the throughput incentive. Some 
options for removing the throughput incentive are gen¬ 
erally called decoupling because these options "decouple" 
profits from sales volume. In its simplest form, decou¬ 
pling is accomplished by periodically adjusting tariff 
prices so that the utility's revenues (and hence its profits) 
are, on a total company basis, held relatively constant in 
the face of changes in customer consumption. 

This appendix explains options to address the throughput 
incentive by changing regulations and the way utilities 
make money, to ensure that utility net income and cover¬ 
age of fixed costs are not affected solely by sales volume. 

Types of Decoupling 

Utilities and regulators have implemented a variety of 
different approaches to remove the throughput incen¬ 
tive. Regardless of which approach is used, a frame of 
reference is created, and used to compare with actual 
results. Periodic tariff price adjustments true up actual 
results to the expected results and are critical to the 
decoupling approach. 

•Average revenue-per-customer. This approach is often 
considered for utilities, where their underlying costs 
during the period between rate adjustments do not 
vary with consumption. Such can be the case for a 


wires-only distribution company, where the majority of 
investments are in the wires and transformers used to 
deliver the commodity. 

• Forecast revenues over a period of time and use a bal¬ 
ancing account. This approach is often considered for 
utilities where a significant portion of the costs (primarily 
fuel) vary with consumption. For these cases, it might 
be best to use a price-based decoupling mechanism for 
the commodity portion of electric service (which gives 
the utility the incentive to reduce fuel and other vari¬ 
able costs), while using a revenue-per-customer 
approach for the "wires" costs. Alternatively, regula¬ 
tors can use traditional tariffs for the commodity por¬ 
tion and apply decoupling only to the wires portion of 
the business. 

Sample Approach to Removing the 
Throughput Incentive 1 

Implementing decoupling normally begins with a tradi¬ 
tional revenue requirement rate case. Decoupling can 
also be overlaid on existing tariffs where there is a high 
confidence that those tariffs continue to represent the 
utility's underlying revenue requirements. 

Under traditional rate of return regulation: 

Price (Rates) = Revenue Requirement/Sales 
(test year or forecasted) 


1 In this section, the revenue per customer approach is discussed, but can be easily adapted to a revenue forecast approach. 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix A-1 












The revenue requirement as found in the rate case will not 
change again until the next rate case. Note that the rev¬ 
enue requirement contains an allowance for profit and 
debt coverage. Despite all the effort in the rate case to cal¬ 
culate the revenue requirement, what really matters after 
the rate case is the price the consumer pays for electricity. 

After the rate case: 

Actual revenues = Price * Actual Sales 

And 

Actual Profit = Actual Revenue - Actual Costs 

Based on the rate case "test year" data, an average revenue- 
per-customer value can then be calculated for each 
rate class. 

Revenue Requirement t 0 /number of customers t 0 = 
revenue per customer (RPC) 

Thus, at time "zero"(t 0 ), the company's revenues equal 
its number of customers multiplied by the revenues per 
customer, while the prices paid by customers equal the 
revenues to be collected divided by customers' con¬ 
sumption units (usually expressed as $/kW for metered 
demand and $/kWh for metered energy). Looking for¬ 
ward, as the number of customers changes, the revenue 
to be collected changes. 

Revenue Requirement t n = RPC * number of customers t n 

For each future period (t 1( t 2 ... f t n ), the new revenue to 
be collected is then divided by the expected consump¬ 
tion to periodically derive a new price, the true-up. 

Price (Rates) t n = Revenue Requirement t n / Sales t n 

True up = Price t n - Price t 0 

Prices can also be trued-up based on deviations between 
revenue and cost forecasts and actual results, where a 
forecast approach is used. Note that no redesign of rates 


is necessary as part of decoupling. Rate redesign might y 
be desirable for other reasons (for more information on 
changes that promote energy efficiency, see Chapter 5: 
Rate Design), and decoupling does not interfere with 
those reasons. 

The process can be augmented by various features that, 
for example, explicitly factor in utility productivity, 
exogenous events (events of financial significance, out 
of control of the utility), or factors that might change 
RPC over time. 

Timing of Adjustments 

Rates can be adjusted monthly, quarterly, or annually 
(magnitude of any t n ). By making the adjustments more 
often, the magnitude of any price change is minimized. 
However, frequent adjustments will impose some addi¬ 
tional administrative expense. A plan that distinguishes 
commodity cost from other costs could have more fre¬ 
quent adjustments for more volatile commodities (if 
these are not already being dealt with by an adjustment 
clause). Because the inputs used for these adjustments 
are relatively straight-forward, coming directly from the 
utility's billing information, each filing should be largely 
administrative and not subject to a significant controversy 
or litigation. This process can be further streamlined 
through the use of "deadbands," which allow for small 
changes in either direction in revenue or profits with no 
adjustment in rates. 

Changes to Utility Incentives 


With decoupling in place, a prudently managed utility will 
receive revenue from customers that will cover its fixed 
costs, including profits. If routine costs go up, the utility will 
absorb those costs. A reduction in costs produces the 
opportunity for additional earnings. The primary driver for 
profitability growth, however, will be the addition of new 
customers, and the greatest contribution to profits will be 
from customers who are more efficient—that is, whose 
incremental costs are the lowest. 


Appendix A-2 National Action Plan for Energy Efficiency 













An effective decoupling plan should lower utility risk to 
some degree. Reduced risk should be reflected in the 
cost of capital and, for investor-owned utilities, can be 
realized through either an increase in the debt/equity 
ratio, or a decrease in the return on equity investment. 
For all utilities, these changes will flow through to debt 
ratings and credit requirements. 


In addition, decoupling can be combined with perform¬ 
ance indicators to ensure that service quality is main¬ 
tained, and that cost reductions are the result of gains in 
efficiency and not a decline in the level of service. Other 
exogenous factors, such as inflation, taxes, and economic 
conditions, can also be combined with decoupling; how¬ 
ever, these factors do not address the primary purpose of 
removing the disincentive to efficiency. Also, if there is a 
distinct productivity for the electric utility as compared 
with the general economy, a factor accounting for it can 
be woven into the revenue per customer calculations 
over time. 




Allocation of Weather Risk 


One specific factor that is implicit in any regulatory 
approach (whether it be traditional regulation or decou¬ 
pling) is the allocation of weather risk between utilities 
and their customers. Depending on the policy position of 
the regulatory agency, the risk of weather changes can 
be allocated to either customers or the utility. This deci¬ 
sion is inherent to the rate structure, even if the regula¬ 
tory body makes no cognizant choice. 











Under traditional regulation, weather risk is usually 
largely borne by the utility, which means that the utility 
can suffer shortfalls if the weather is milder than normal. 
At the same time, it can enjoy windfalls if the weather is 
more extreme than normal. These scenarios result 
because, while revenues will change with weather, the 
underlying cost structure typically does not. These situa¬ 
tions translate directly into greater earnings variability, 
which implies a higher required cost of capital. In order 
to allocate the weather risk to the utility, the "test year" 


information used to compute the base revenue-per-cus- 
tomer values should be weather normalized. Thereafter, 
with each adjustment to prices, the consumption data 
would weather normalize as well. 


Potential Triggers and 
Special Considerations in 
Decoupling Mechanisms 

Because decoupling is a different way of doing business 
for regulators and utilities, it is prudent to consider off¬ 
ramps or triggers that can avoid unpleasant surprises. 
The following are some of the approaches that might be 
appropriate to consider: 

•Banding of rate adjustments. To minimize the magni¬ 
tude of adjustments, the decoupling mechanism could 
be premised on a "dead band" within which no adjust¬ 
ment would be made. The effect would be to reduce 
the number of tariff changes and possibly, but not 
necessarily, the associated periodic filings. 

The plan can also cap the amount of any single rate 
adjustment. To the extent it is based on reasonable 
costs otherwise recoverable under the plan, the excess 
could be set aside in a regulatory account for later 
recovery. 

• Banding of earnings. To control the profit level of the 
regulated entity within some bounds, earnings greater 
and/or less than certain limits can be shared with cus¬ 
tomers. For example, consider a scenario in which the 
earnings band is 1 percent on return on equity (either 
way) compared to the allowed return found in the most 
recent rate case. If the plan would share results outside 
the band 50-50, then if the utility earns +1.5 percent of 
the target, an amount equal to 0.25 percent of earnings 
(half the excess) is returned to consumers through a price 
adjustment. If the utility earns -1.3 percent of the target, 
however, an amount equal 0.15 percent of earnings (half 
the deficiency) is added to the price. Designing this band 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix A-3 















should leave the utility with ample incentive to make 
and benefit from process engineering improvements 
during the plan, recognizing that a subsequent rate 
case might result in the benefits accruing in the long 
run to consumers. While the illustration is "symmetri¬ 
cal," in practice, the band can be asymmetrical in size 
and sharing proportion to assure the proper balance 
between consumer and utility interests. 

• Course corrections for customer count changes, major 
changes for unique major customers, and large 
changes in revenues-per-customer. Industrial con¬ 
sumers might experience more volatility in average use 
per customer calculations because there are typically a 
small number of these customers and they can be quite 
varied. For example, the addition or deletion of one 
large customer (or of a work shift for a large customer) 
might make a significant difference in the revenue per 
customer values for that class, or result in appropriate 
shifting of revenues among customers. To address this 
problem, some trigger or off-ramp might be appropriate 
to review such unexpected and significant changes, 
and to modify the decoupling calculation to account 
for them. In some cases, a new rate case might be 
warranted from such a change. 


• Accounting for utilities whose marginal revenues per / 
customer are significantly different than their embedded 
average revenue per customer. If a utility's revenue per 
customer has been changing rapidly over time, imposi¬ 
tion of a revenue-per-customer decoupling mechanism 
will have the effect of changing its profit growth path. 
For example, if incremental revenues per customer are 
growing rapidly, decoupling will have the effect of low¬ 
ering future earnings, although not necessarily below 
the company's allowed rate of return. On the other 
hand, if incremental revenues per customer are declin¬ 
ing, decoupling will have the effect of increasing future 
earnings. Where these trends are strong and there is a 
desire to make decoupling "earnings neutral," vis-a-vis 
the status quo earning path, the revenue-per-customer 
value can be tied to an upward or downward growth 
rate. This type of adjustment is more oriented toward 
maintaining neutrality than reflecting any underlying 
economic principle. Care should be taken to exclude 
recent growth in revenues per customer that are driven 
by inefficient consumption (usually tied to the utility 
having a pro-consumption marketing program). 


Appendix A-4 National Action Plan for Energy Efficiency 





Appendix Business Case 

B: Details 



To help natural gas and electric utilities, utility regulators, and partner organizations communicate the 
business case for energy efficiency, the National Action Plan for Energy Efficiency provides an Energy 
Efficiency Benefits Calculator (Calculator available at www.epa.gov/cleanenergy/eeactionplan.htm). This 
Calculator examines the financial impact of energy efficiency on major stakeholders, and was used to 
develop the eight cases discussed in Chapter 4: Business Case for Energy Efficiency. Additional details on 
these eight cases are described in this appendix. 


Overview 

A business case is an analysis that shows the benefits of 
energy efficiency to the utility, customers, and society 
within an approach that can lead to actions by utilities, 
regulators, and other stakeholders. Making the business 
case for energy efficiency programs requires a different 
type of analysis than that required for traditional supply- 
side resources. Because adoption of energy efficiency 
reduces utility sales and utility size, traditional metrics 
such as impact on rates and total earnings do not 
measure the benefits of energy efficiency. However, by 
examining other metrics, such as customer bills and utility 


earnings per share, the benefits to all stakeholders of 
adopting energy efficiency can be demonstrated. These 
benefits include reduced customer bills, decreased cost 
per unit of energy provided, increased net resource sav¬ 
ings, decreased emissions, and decreased reliance on 
energy supplies. 

This appendix provides more detailed summary and inter¬ 
pretation of results for the eight cases discussed in 
Chapter 4: Business Case for Energy Efficiency. All 
results are from the Energy Efficiency Benefits Calculator's 
interpretation tab. 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-1 





Case 1: Low-Growth Electric and Gas Utility 


Utility Perspective 


Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are share¬ 
holder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on 
the type of utility, the measure of financial health changes. Investor-owned utility health is measured by return on equity 
(ROE), while publicly or cooperatively owned utility health is measured by cash position or debt coverage ratio. 


Electric 



Gas 


Investor-Owned Utility Comparison of 
Return on Equity 


15% 


12 % 


O 

C£ 

X 


cu 


9% 


6 % ■ 


3% 


n-r— 

5 6 

Year 


10 


• ROE% - No EE 
“ ROE% - EE no Decoupling 
“ ROE% - EE and Decoupling 
“ Target ROE% 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, frequency of rate adjustments, and other factors. If energy 
efficient (EE) reduces capital investment, the earnings will be lower in the EE case, unless shareholder incentives for EE are 
introduced. However, utility return (ROE or earnings per share) may not be affected. 


Utility Earnings 



- - - • Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 
— Earnings $MM - EE and Decoupling 


Utility Earnings 



Year 

■ - - • Earnings $MM - No EE 
— ■ ■■■ Earnings $MM - EE no Decoupling 

———■ Earnings $MM - EE and Decoupling 


Appendix B-2 National Action Plan for Energy Efficiency 





















































































Customer Perspective 

Customer Bills - Decrease 

In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total cus¬ 
tomer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy 
consumption. 


Electric 



Gas 


Percent Change in Customer Bills 



Change in Customer Bills (%) - EE no Decoupling 
Change in Customer Bills (%) - EE and Decoupling 


Utility Rates - Mild Increase 

The rates customers pay (S/kWh, $/therm) increase when avoided costs are less than retail rates, which is typically the case 
for most EE programs. Rates increase because revenue requirements increase more quickly than sales. 


Comparison of Average Rate 


Comparison of Average Rate 




- - - • Utility Average Rate - No EE 
———■— Utility Average Rate - EE no Decoupling 
——— Utility Average Rate - EE and Decoupling 


- - - * Utility Average Rate - No EE 
———— Utility Average Rate - EE no Decoupling 
— 1 —Utility Average Rate - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-3 



























































































Societal Perspective 
Societal Net Savings - Increase 

The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the first year, 
the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings 
that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the 
same with and without decoupling; therefore, only one line is shown. 


Electric 


Annual Total Societal Net Savings 


CD 

C 

CD 

CQ 

+-» 

O) 

\j 

o 

uo 

4 —' 

<V 



Year 


Total Societal Net Savings ($M) 



Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs during peak periods. Well-designed EE programs can deliver 
energy at an average cost less than that of new power sources. When the two lines cross, the annual cost of EE equals the 
annual savings resulting from EE. The Societal Cost and Societal Savings are the same with and without decoupling. 


Delivered Costs and Benefits of EE 



Societal Cost ($/MWh saved) 
Societal Savings ($/MWh saved) 



Appendix B-4 National Action Plan for Energy Efficiency 













































































Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions 
costs and savings are the same with and without decoupling. 

Electric Gas 


Annual Emissions Savings 


Annual Emissions Savings 



Year 


T3 

<u 

> 

TO 

un 

fN 

o 

u 

on 

C 

o 

I— 

o 

o 

o 



Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illus¬ 
trates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With 
load growth assumed at zero, no load or percent growth offset shown. 



Percent Growth Offset by Energy Efficiency 



Year 

- - - - Energy Savings - EE (Mcf) 

. Load Growth - No EE (Mcf) 

Growth Offset by EE (%) 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-5 

























































































Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted 
by decoupling. 


Electric 


Comparison of Peak Load Growth 



Year 


Forecasted Growth - No EE 
Forecasted Growth - EE and Decoupling 


Gas 


Comparison of Peak Load Growth 



Forecasted Growth - No EE 
Forecasted Growth - EE and Decoupling 








Appendix B-6 National Action Plan for Energy Efficiency 














































Case 2: High-Growth Electric and Gas Utility 


Utility Perspective 


Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are share¬ 
holder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on 
the type of utility, the measure of financial health changes. Investor-owned utility health is measured by ROE, while publicly 
or cooperatively owned utility health is measured by cash position or debt coverage ratio. 


Electric 


Investor-Owned Utility Comparison of 
Return on Equity 



15% 


sO 

0 s 

12% 

LU 

o 

cn 

X 

9% 

TO 

1— 

k_ 

a> 

H— 

6% 

< 

3% 




Year 


10 


- - - ■ ROE% - No EE 

.. ROE% - EE no Decoupling 

ROE% - EE and Decoupling 
- “ ■ Target ROE% 


Gas 


Investor-Owned Utility Comparison of 
Return on Equity 



15% 


xP 

0 s 

12% 

LU 

o 

on 

X 

9% 

<T5 

1— 

a3 

M— 

6% 

< 

3% 


t - r~ 

5 6 
Year 


10 


- - - ■ ROE% - No EE 

ROE% - EE no Decoupling 

... 1 ROE% - EE and Decoupling 

““ " * Target ROE% 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, frequency of rate adjustments, and other factors. If EE reduces 
capital investment, the earnings will be lower in the EE case, unless shareholder incentives for EE are introduced. However, 
utility return (ROE or earnings per share) may not be affected. 


Utility Earnings 



Year 


- - - ■ Earnings $MM - No EE 

.. ... Earnings $MM - EE no Decoupling 
'■ Earnings $MM - EE and Decoupling 


Utility Earnings 



Year 


- - - . Earnings $MM - No EE 

...— Earnings $MM - EE no Decoupling 
■— Earnings $MM - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-7 













































































Customer Perspective 

Customer Bills - Decrease 

In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total cus¬ 
tomer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy 
consumption. 


Electric Gas 




Utility Rates - Mild Increase 

The rates customers pay ($/kWh, $/therm) increase when avoided costs are less than retail rates, which is typically the case 
for most EE programs. Rates increase because revenue requirements increase more quickly than sales. 


Comparison of Average Rate 


Comparison of Average Rate 



$0.30 


-C 

<: 

$0.25 

CD 

-*-* 

$0.20 

ru 

CH 

CD 

CD 

ro 

L_ 

$0.15 

<D 

> 

< 

$0.10 


n-r 

5 6 

Year 


10 


e 

<u 


<v 

03 

oc 

ai 

cn 

03 

cD 

> 

< 



Year 


” - - • Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 
Utility Average Rate - EE and Decoupling 


• Utility Average Rate - No EE 

* Utility Average Rate - EE no Decoupling 
■ Utility Average Rate - EE and Decoupling 


Appendix B-8 National Action Plan for Energy Efficiency 




















































































Societal Perspective 
Societal Net Savings - Increase 

The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the first year, 
the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings 
that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the 
same with and without decoupling; therefore, only one line is shown. 

Electric Gas 




Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs during peak periods. Well-designed EE programs can deliver energy 
at an average cost less than that of new power sources. When the two lines cross, the annual cost of EE equals the annual 
savings resulting from EE. The Societal Cost and Societal Savings are the same with and without decoupling. 




To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-9 















































































Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions 
costs and savings are the same with and without decoupling. 

Electric Gas 


Annual Emissions Savings 


Annual Emissions Savings 



T3 

<U 

> 

03 

1/3 

o 

u 

1/3 

c 

o 

h- 

o 

o 

o 



Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illus¬ 
trates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With 
load growth assumed at zero, no load or percent growth offset shown. 


Percent Growth Offset by Energy Efficiency 



“ “ “ “ Energy Savings - EE (GWh) 

. ... Load Growth - No EE (GWh) 

Growth Offset by EE (%) 


Percent Growth Offset by Energy Efficiency 



Year 


25% 

20 % 

15 % 

10 % 

5% 

0 % 


“ " Energy Savings - EE (Mcf) 

— Load Growth - No EE (Mcf) 

— Growth Offset by EE (%) 


Appendix B-10 National Action Plan for Energy Efficiency 
















































































Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted 
by decoupling. 


Electric Gas 




To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-11 









































Case 3: Low-Growth with Power Plant Deferral 


Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 


Investor-Owned Utility Comparison of 
Return on Equity 



' ROE% - No EE 
“ ROE% - EE no Decoupling 
- ROE% - EE and Decoupling 
“ Target ROE% 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE reduces 
capital investment, the earnings will be lower in the EE case, 
unless shareholder incentives for EE are introduced. However, 
utility return (ROE or earnings per share) may not be affected. 


Utility Earnings 



Year 


- - - • Earnings $MM - No EE 
——— Earnings $MM - EE no Decoupling 
. . Earnings $MM - EE and Decoupling 


Appendix B-1 2 National Action Plan for Energy Efficiency 











































Customer Perspective 


Societal Perspective 


Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 


Percent Change in Customer Bills 



Year 


Change in Customer Bills (%) - EE no Decoupling 
Change in Customer Bills (%) - EE and Decoupling 


Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 


Comparison of Average Rate 



Year 


- - - ■ Utility Average Rate - No EE 
——— Utility Average Rate - EE no Decoupling 
1 Utility Average Rate - EE and Decoupling 


Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 



To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-13 

































































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can 
deliver energy at an average cost less than that of new 
power sources. Societal savings increase when an infra¬ 
structure project is delayed and then decrease when built. 
When the two lines cross, the annual cost of EE equals the 
annual savings resulting from EE. 



Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost 
savings increases when emissions cost is monetized. 
Emissions costs and savings are the same with and with¬ 
out decoupling. 


Annual Emissions Savings 



Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. / 
This comparison shows the growth with and without EE, 
and illustrates the amount of EE relative to load growth. 
Load growth and energy savings are not impacted by 
decoupling. With load growth assumed at zero, no load or 
percent growth offset shown. 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity 
savings are captured due to EE measures. Peak load is not 
impacted by decoupling. 


Comparison of Peak Load Growth 



Year 


Forecasted Growth - No EE 
Forecasted Growth - EE and Decoupling 


Appendix B-14 National Action Plan for Energy Efficiency 
























































































Case 4: High-Growth With Power Plant 

Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 


Investor-Owned Utility Comparison of 
Return on Equity 



- - - - ROE% - No EE 

" ROE% - EE no Decoupling 
ROE% - EE and Decoupling 

— " ■ Target ROE% 


Deferral 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE 
reduces capital investment, the earnings will be lower in 
the EE case, unless shareholder incentives for EE are intro¬ 
duced. However, utility return (ROE or earnings per share) 
may not be affected. 


Utility Earnings 



- - - • Earnings $MM - No EE 

. .. Earnings $MM - EE no Decoupling 

' Earnings $MM - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-15 









































Customer Perspective 


Societal Perspective 




Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 


Percent Change in Customer Bills 



Change in Customer Bills (%) - EE no Decoupling 
Change in Customer Bills (%) - EE and Decoupling 


Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 


Comparison of Average Rate 



$ 0.30 


JZ 

<; 

$ 0.25 

CD 

$ 0.20 

03 

cn 

CD 

cn 

03 

$ 0.15 

(V 

> 

< 

$ 0.10 




i—i—i—i—i—i—i—i— 

1 2 3 4 5 6 7 8 9 10 

Year 


Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 




/. 








Annual Total Societal Net Savings 


$600 


$400 


CD 

c 

CD 

CXI 


$200 


$0 


IX! 
-»—* 
CD 


U 

O 

C/1 


-$200 


CD 


-$400 


-$600 



5 6 
Year 


10 


Total Societal Net Savings ($M) 




“ “ “ • Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 
Utility Average Rate - EE and Decoupling 




Appendix B-16 National Action Plan for Energy Efficiency 











































































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can 
deliver energy at an average cost less than that of new 
power sources. Societal savings increase when an infra¬ 
structure project is delayed and then decrease when built. 
When the two lines cross, the annual cost of EE equals the 
annual savings resulting from EE. 



Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost 
savings increases when emissions cost is monetized. 
Emissions costs and savings are the same with and without 
decoupling. 


Annual Emissions Savings 



Year 


"O 

CD 

> 

ro 

to 

c 

O 

u 

in 

c 

o 

I— 

o 

o 

o 


Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. This 
comparison shows the growth with and without EE, and 
illustrates the amount of EE relative to load growth. Load 
growth and energy savings are not impacted by decoupling. 
With load growth assumed at zero, no load or percent 
growth offset shown. 


Percent Growth Offset by Energy Efficiency 

160 % 
140 % 
120 % 
100 % 
80 % 
60 % 
40 % 
20 % 
0 % 

1 23456789 10 

Year 

“ “ “ ■ Energy Savings - EE (GWh) 

11 Load Growth - No EE (GWh) 

.. Growth Offset by EE (%) 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity sav¬ 
ings are captured due to EE measures. Peak load is not 
impacted by decoupling. 


Comparison of Peak Load Growth 


>- 


■o 

ru 

O 


-V 

<T3 

O) 

Q_ 



1 2 3 4 5 6 7 8 9 10 

Year 


Forecasted Growth - No EE 
Forecasted Growth - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-17 

















































































Case 5: Vertically Integrated Utility 




Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 


Investor-Owned Utility Comparison of 
Return on Equity 



15 % 

xo 

12 % 

LU 

o 

Cd 

X 

03 

1— 

9 % 

\ _ 

CD 

-t—' 

< 

6% 


3 % 


2 3 


l r 

5 6 

Year 


10 


■ ROE% - No EE 
“ ROE% - EE no Decoupling 
“ ROE% - EE and Decoupling 
“ Target ROE% 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE 
reduces capital investment, the earnings will be lower in the 
EE case, unless shareholder incentives for EE are introduced. 
However, utility return (ROE or earnings per share) may not 
be affected. 


Utility Earnings 



$100 


$80 

2 

$60 

CO 

Cn 
_c 
'c 

$40 

CD 


LU 

$20 


$o 




i-r 

5 6 

Year 


10 


Earnings $MM - No EE 
Earnings $MM - EE no Decoupling 
Earnings $MM - EE and Decoupling 




Appendix B-18 National Action Plan for Energy Efficiency 










































Customer Perspective 
Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 



Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 


Comparison of Average Rate 



Year 


- - - • Utility Average Rate - No EE 
——— Utility Average Rate - EE no Decoupling 
——— Utility Average Rate - EE and Decoupling 


Societal Perspective 

Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 



To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-19 

























































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can 
deliver energy at an average cost less than that of new 
power sources. When the two lines cross, the annual cost 
of EE equals the annual savings resulting from EE. The 
Societal Cost and Societal Savings are the same with and 
without decoupling. 


Delivered Costs and Benefits of EE 



Year 


Societal Cost ($/MWh saved) 
Societal Savings ($/MWh saved) 


Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost 
savings increases when emissions cost is monetized. 
Emissions costs and savings are the same with and with¬ 
out decoupling. 


Annual Emissions Savings 



Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. ; 
This comparison shows the growth with and without EE, 
and illustrates the amount of EE relative to load growth. 
Load growth and energy savings are not impacted by 
decoupling. With load growth assumed at zero, no load or 
percent growth offset shown. 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity 
savings are captured due to EE measures. Peak load is not 
impacted by decoupling. 



Appendix B-20 National Action Plan for Energy Efficiency 

























































































Case 6: Restructured Delivery-Only Utility 


Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 



Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE 
reduces capital investment, the earnings will be lower in the 
EE case, unless shareholder incentives for EE are introduced. 
However, utility return (ROE or earnings per share) may not 
be affected. 



To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-21 






































Customer Perspective 
Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 



Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 


Comparison of Average Rate 


$ 0.30 


^ $ 0.25 

& $ 0.20 
03 

cc 

Ol 
03 

£ $ 0.15 

<u 
> 

< 

$ 0.10 

123456789 10 

Year 



■ Utility Average Rate - No EE 
“ Utility Average Rate - EE no Decoupling 
“ Utility Average Rate - EE and Decoupling 


Societal Perspective 
Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 





Appendix B-22 National Action Plan for Energy Efficiency 








































































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can 
deliver energy at an average cost less than that of new 
power sources. When the two lines cross, the annual cost 
of EE equals the annual savings resulting from EE. The 
Societal Cost and Societal Savings are the same with and 
without decoupling. 


Delivered Costs and Benefits of EE 



Year 


Societal Cost ($/MWh saved) 
Societal Savings ($/MWh saved) 


Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost 
savings increases when emissions cost is monetized. 
Emissions costs and savings are the same with and with¬ 
out decoupling. 


Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. 
This comparison shows the growth with and without EE, 
and illustrates the amount of EE relative to load growth. 
Load growth and energy savings are not impacted by 
decoupling. With load growth assumed at zero, no load or 
percent growth offset shown. 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity 
savings are captured due to EE measures. Peak load is not 
impacted by decoupling. 


Comparison of Peak Load Growth 



Annual Emissions Savings 



T3 
Ol 
> 
ro 

i/i 

rs, 

o 

u 

l/l 

c 

o 

I— 

o 

o 

o 


Year 


- - - - Forecasted Growth - No EE 

■■ Forecasted Growth - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-23 






















































































Case 7: Electric Publicly and Cooperatively Owned Debt Coverage Ratio 




Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 


Public Power/Cooperative 
Debt Coverage Ratio 



• Debt Coverage Ratio - No EE 
“ Debt Coverage Ratio - EE no Decoupling 
" Debt Coverage Ratio - EE and Decoupling 




Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE 
reduces capital investment, the earnings will be lower in the 
EE case, unless shareholder incentives for EE are introduced. 
However, utility return (ROE or earnings per share) may not 
be affected. 


Utility Earnings 



- - - ■ Earnings $MM - No EE 
——— Earnings $MM - EE no Decoupling 
. Earnings $MM - EE and Decoupling 


Appendix B-24 National Action Plan for Energy Efficiency 




































Customer Perspective 
Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 


Percent Change in Customer Bills 



Year 


Change in Customer Bills (%) - EE no Decoupling 
Change in Customer Bills (%) - EE and Decoupling 


Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 


Comparison of Average Rate 



Year 


- - - • Utility Average Rate - No EE 

111 Utility Average Rate - EE no Decoupling 
—— Utility Average Rate - EE and Decoupling 


Societal Perspective 

Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 



To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-25 

































































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can deliver 
energy at an average cost less than that of new power 
sources. When the two lines cross, the annual cost of EE 
equals the annual savings resulting from EE. The Societal 
Cost and Societal Savings are the same with and without 
decoupling. 



Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost 
savings increases when emissions cost is monetized. 
Emissions costs and savings are the same with and with¬ 
out decoupling. 


Annual Emissions Savings 



Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. 
This comparison shows the growth with and without EE, 
and illustrates the amount of EE relative to load growth. 
Load growth and energy savings are not impacted by 
decoupling. With load growth assumed at zero, no load or 
percent growth offset shown. 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity 
savings are captured due to EE measures. Peak load is not 
impacted by decoupling. 



Appendix B-26 National Action Plan for Energy Efficiency 



















































































Case 8: Electric Publicly and Cooperatively Owned Cash Position 

* —^ -- - 




Utility Perspective 

Utility Financial Health - Small Changes 

The change in utility financial health depends on whether or 
not there are decoupling mechanisms in place, if there are 
shareholder incentives in place (for investor-owned utilities), 
the frequency of rate adjustments, and other factors. 
Depending on the type of utility, the measure of financial 
health changes. Investor-owned utility health is measured by 
ROE, while publicly or cooperatively owned utility health is 
measured by cash position or debt coverage ratio. 


Cash Position at End of Year 


CO 

03 

u 

v_ 

03 

<L> 

>- 


"O 

c 



' Cash Position - No EE 

■ Cash Position - EE no Decoupling 

■ Cash Position - EE and Decoupling 


Utility Earnings - Results Vary 

Utility earnings depend on growth rate, capital investment, 
frequency of rate adjustments, and other factors. If EE 
reduces capital investment, the earnings will be lower in the 
EE case, unless shareholder incentives for EE are introduced. 
However, utility return (ROE or earnings per share) may not 
be affected. 


Utility Earnings 



$100 


o 

CO 

*** 

2 

$60 

CO 

CT) 

c 

'c 

$40 

TO 

LU 

$20 


$0 


5 6 
Year 


10 


- - - • Earnings $MM - No EE 

.. Earnings $MM - EE no Decoupling 

——— Earnings $MM - EE and Decoupling 


To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-27 





































* 


Customer Perspective 
Customer Bills - Decrease 

In the first year, customer utility bills increase because the 
cost of the EE program has not yet produced savings. Total 
customer bills decline over time, usually within the first 
three years, indicating customer savings resulting from 
lower energy consumption. 


Percent Change in Customer Bills 



Year 


Change in Customer Bills (%) - EE no Decoupling 
Change in Customer Bills (%) - EE and Decoupling 


Utility Rates - Mild Increase 

The rates customers pay ($/kWh) increase when avoided 
costs are less than retail rates, which is typically the case for 
most EE programs. Rates increase because revenue require¬ 
ments increase more quickly than sales. 



Societal Perspective 


Societal Net Savings - Increase 

The net savings are the difference of total utility costs, 
including EE program costs, with EE and without EE. In the 
first year, the cost of the EE program is a cost to society. 
Over time, cumulative EE savings lead to a utility production 
cost savings that is greater than the EE program cost. The 
graph shape is therefore upward sloping. Total Societal Net 
Savings is the same with and without decoupling; there¬ 
fore, only one line is shown. 


Annual Total Societal Net Savings 



Total Societal Net Savings ($M) 










Appendix B-28 National Action Plan for Energy Efficiency 




































































Total Societal Cost Per Unit - Declines 

Total cost of providing each unit of energy (MWh) declines 
over time because of the impacts of energy savings, 
decreased peak load requirements, and decreased costs 
during peak periods. Well-designed EE programs can 
deliver energy at an average cost less than that of new 
power sources. When the two lines cross, the annual cost 
of EE equals the annual savings resulting from EE. The 
Societal Cost and Societal Savings are the same with and 
without decoupling. 



Emissions and Cost Savings - Increase 

Annual tons of emissions saved increases. Emissions cost sav¬ 
ings increases when emissions cost is monetized. Emissions 
costs and savings are the same with and without decoupling. 


Annual Emissions Savings 



T3 

CD 

> 

TO 

l/l 

fM 

o 

u 

1/1 

c 

o 

I— 

o 

o 

o 


Growth Offset by EE - Increase 

As EE programs ramp up, energy consumption declines. 
This comparison shows the growth with and without EE, 
and illustrates the amount of EE relative to load growth. 
Load growth and energy savings are not impacted by 
decoupling. With load growth assumed at zero, no load or 
percent growth offset shown. 



Peak Load Growth - Decrease 

Peak load requirements decrease because peak capacity 
savings are captured due to EE measures. Peak load is not 
impacted by decoupling. 



To create a sustainable, aggressive national commitment to energy efficiency 


Appendix B-29 






































































































Funding and printing for this report was provided by the U.S. Department of Energy and U.S. Environmental 
Protection Agency in their capacity as co-sponsors for the National Action Plan for Energy Efficiency. 

Recycled/Recyclable—Printed with Vegetable Oil Based Inks on 100% (Minimum 50% postconsumer) Recycled Paper 










